MNI ECB WATCH: ECB Set For First Rates Pause Since July 2022

The European Central Bank is set to leave interest rates on hold for the first time since July 2022 when it meets in Athens on Thursday, though upside risks to inflation from energy and wages might prompt some Governing Council members to push for a 25-basis-point hike in December.

Still, with October’s euro area Bank Lending Survey showing continued strong tightening of financial conditions, many members will be wary of overtightening, after 10 consecutive hikes boosted the deposit rate by 450 basis points to 4% in September. (See MNI INTERVIEW: ECB Growth Assumptions Over-Optimistic).

At its last meeting, the ECB said rates had reached levels that would contribute to a timely reduction of inflation to the 2% target, and officials are likely to follow Chief Economist Philip Lane in indicating that the Bank is likely to remain “on guard for an extended period". (See MNI SOURCES: ECB Doves Wary Of December Push For Hike).

Potential changes to reserve remuneration could be on the agenda, having been highlighted by some governors in recent weeks, but with July’s adjustment to 0% having only come into effect at the end of September, any change would be a surprise.

Council members may also debate the future of reinvestments from the ECB’s Pandemic Emergency Purchase Programme, currently set to run until at least the end of 2024, with more hawkish members keener to discuss a timetable for winding them up.

But with the recent bond market sell-off, and with the results of the Operational Strategy Review not due until the spring, the ECB will look to preserve its first line of defence against market fragmentation for now.