CORRECTED-MNI ECB WATCH: ECB To Hold Again As Hikes Off Table

(Corrects inflation data in second paragraph)

The European Central Bank is expected to hold key interest rates at 4.00% this Thursday, amid questions over the timing of a first cut and the future of reinvestments from its Pandemic Emergency Purchase Programme.

Recent rapid declines in headline inflation - down from 4.3% in September to 2.9% in October and an estimated 2.4% in November - combined with hawkish Executive Board member Isabel Schnabel’s partial about-face amid concerns over slowing growth, have left hikes off the table for the foreseeable future.

December’s Eurosystem staff macroeconomic growth and inflation projections - the first to include 2026 - should reflect the change in circumstances. Growth will continue to stagnate, before improving somewhat as purchasing power picks up next year. Near-term price pressures should be seen softening slightly, with headline inflation at the ECB’s medium-term target of 2% by 2025 and into 2026.

CORE ABOVE TARGET

However core inflation - a key measure of the strength of underlying inflation - is still above target at 3.6%. Several sources have told MNI that they would need to see it sub-3% consistently before cut talks can begin in earnest. (See MNI SOURCES: ECB Needs Sub-3% Core Inflation To Consider Cuts).

The contribution of tight labour markets and pay rises to sticky prices remain central pieces of the puzzle, especially in Germany, where Bundesbank chief Joachim Nagel has argued that the road ahead will be “bumpy [...] with ups and downs in inflation over the near future”. (See MNI INTERVIEW: ECB Too Confident On Rates-Holtemoeller).

President Christine Lagarde is likely to lean against premature market talk of cuts. Yet past interest rate increases continue to be transmitted “forcefully” into financing conditions, as she said in October, and she may express signs of cautious optimism.

Discussions around PEPP reinvestments - due to expire no sooner than the end of 2024 - could also intensify. But although a decision on the timing and pace of reduction is only an outside possibility, an indication that policymakers are considering a change to the current schedule is not out of the question. (See MNI INTERVIEW2: ECB To Discuss PEPP Reinvestment In Dec-VujcicVujcic).