ECB Likely to Keep Key Interest Rate Steady... Considering 2400 Trillion Quantitative Tightening

ECB Monetary Policy Meeting on the 26th
First Interest Rate Hold Expected
Discussion on PEPP Reinvestment Suspension to Begin Expected

The European Central Bank (ECB) is expected to halt its interest rate hikes, which have continued for over a year, at its monetary policy meeting on the 26th (local time). This effectively marks the end of monetary tightening. However, since there remains a possibility of inflation rebounding, the ECB is likely to convey a message to the market that high interest rates could persist for a long time.

According to major foreign media on the 24th, Konstantin Bait, portfolio manager at PIMCO, the world's largest bond management firm, said, "ECB members will keep the possibility of further rate hikes open, but the upper limit of interest rates is already high," expressing a high likelihood that the ECB will keep the benchmark interest rate unchanged.

However, despite the economic slowdown in the Eurozone, the current high interest rate level is expected to continue. Manager Bait said, "Just a month ago, the market expected the ECB to cut rates three times next year, but now it is slightly above two times," adding, "Inflation risks remain high, so it is too early to predict when rate cuts will begin."

Christine Lagarde, President of the European Central Bank (ECB)
[Photo by Yonhap News]

Since July last year, the ECB has raised interest rates ten times in a high-intensity manner, increasing the deposit rate from a historic low of -0.5% to the current 4%. As a result, the Eurozone's consumer price index in September rose 4.3% compared to a year earlier, slowing down from 5.2% in August. The inflation rate for October is also expected to be lower than September but is still projected to exceed the ECB's target of 2%. Additionally, the war triggered by the surprise attack of the Palestinian militant group Hamas on Israel leaves the possibility of stimulating oil prices.

Accordingly, even if the ECB freezes rates for the first time in one year and three months since it began raising rates in July last year, the prevailing view is that it will not hastily declare the end of tightening. Dirk Schumacher, chief European macroeconomic researcher at Natixis Bank in France and a former ECB economist, diagnosed, "The attack on Israel and the potential chain effects on the oil market are increasing inflationary pressures," adding, "At the same time, the risk of a decline in Eurozone growth is growing, placing the ECB in an even more complex situation."

There are also market expectations that the ECB will begin discussions on quantitative tightening at the monetary policy meeting on the 26th.

Previously, the ECB operated a bond purchase program (PEPP) worth 1.7 trillion euros in response to the COVID-19 pandemic, and it is expected to start discussions on whether to stop reinvesting PEPP at this monetary policy meeting. Following the rapid interest rate hikes so far, the ECB is expected to embark on quantitative tightening measures this time, with experts anticipating that the end of PEPP reinvestment will be moved forward from 2024 to as early as the first quarter of next year.

A recent survey by Bloomberg among economists showed that 43% responded that the ECB would stop PEPP reinvestment, up from 39% in the previous survey.

Some argue that since the European economy is slowing and the bond market has been unstable recently, the ECB should be cautious about starting quantitative tightening. However, delaying the cessation of PEPP reinvestment could cause a policy mismatch where the ECB conducts quantitative tightening after starting rate cuts next year.

Reinhard Cluse, chief European economist at Swiss UBS Bank, said, "Even if the ECB ends PEPP reinvestment a few quarters earlier, the market will not be very surprised," adding, "Quantitative tightening must be announced before starting rate cuts next year. Otherwise, communication with the market could become very difficult."

This content was produced with the assistance of AI translation services.