European Central Bank Expected to Keep Rates on Hold Amid Economic Concerns
The European Central Bank (ECB) is anticipated to maintain its current interest rates when it convenes in Athens this week. Despite easing inflation pressures and a worsening economic outlook for the euro area, the ECB intends to keep rates high for a prolonged period.
The recent volatility in the bond market has raised discussions about an earlier exit from the ECB’s quantitative tightening program. However, with the uncertainty brought on by the attacks on Israel and their potential impact on the oil market, upside risks to inflation remain a concern.
Dirk Schumacher, an ECB watcher at Natixis, stated that while inflation continues to decline, the events unfolding in the Middle East pose a new upside risk. He further added that downside risks to growth have also increased, complicating the ECB’s decision-making process.
According to Eurostat, September’s inflation print showed a decline to 4.3% from August’s 5.2%. Although this decrease was faster than expected, the prevailing risks to inflation are still present through wage effects and the threat of a higher oil price.
Furthermore, bond yields have risen significantly since the last ECB meeting, causing concern among policymakers in Frankfurt. Anatoli Annenkov, a senior European economist at Societe Generale, highlighted that rising long-term interest rates and market volatility could pose significant challenges to the ECB’s policy stance and efforts to avoid a recession.
The increase in yields may also impact discussions regarding the acceleration of the reduction of the ECB’s balance sheet. Reinhard Cluse of UBS cautioned that higher global bond yields and wider spreads could destabilize the ECB if it were to speed up the reduction, particularly related to the Pandemic Emergency Purchase Program (PEPP).
The question of when the ECB will start cutting rates will also be a prominent topic during the meeting. Mark Wall, chief economist with Deutsche Bank, noted that the Governing Council would be cautious about pivoting towards a rate cut too soon. Wall expects the first rate cut to occur in September 2024, but the risk is shifting towards June 2024.
In conclusion, as the ECB meets in Athens, the central bank faces the challenge of balancing the declining inflation rates and worsening economic outlook with the potential risks posed by geopolitical events and volatile bond markets. The decision to keep rates on hold and the discussion surrounding the timing of rate cuts will be crucial in navigating the current economic landscape.