Speaking in Athens, where the Governing Council gathered for one of its regular meetings beyond the European Central Bank’s Frankfurt headquarters, president Christine Lagarde said 'we have to be steady'.

(Oct 26): The European Central Bank (ECB) left interest rates unchanged for the first time in more than a year, as it gauges whether an unprecedented series of hikes will succeed in subduing inflation.

Following last month’s knife-edge decision to lift the deposit rate to a record 4%, policymakers kept it there on Thursday — matching the predictions of all economists surveyed by Bloomberg.

They reiterated in a statement that holding borrowing costs at that level for long enough will make a “substantial contribution” to bringing consumer-price gains back to the 2% target.

Speaking in Athens, where the Governing Council gathered for one of its regular meetings beyond the ECB’s Frankfurt headquarters, president Christine Lagarde said “we have to be steady”.

“Having a discussion on cuts is totally, totally premature,” she told reporters, reiterating her position from September’s meeting. “The fact that we are holding doesn’t mean to say that we will never hike again.”

The euro held losses against the dollar, while German bonds edged higher. Italian bonds, which have been a major beneficiary of ECB debt-buying programmes, outperformed as Lagarde said changes to the €1.7 trillion (US$1.8 trillion or RM8.58 trillion) pandemic emergency purchase programme (PEPP) weren’t discussed this week.

With the ECB’s statement affirming the existing end-2024 cut-off to cease PEPP reinvestments, Italy’s 10-year yield fell 10 basis points, sending the spread over German peers below 200 basis points.

Like its peers in the US and the UK, the ECB hasn’t shut the door to further hikes, should inflation fail to ease quickly enough. But there’s little doubt among economists and investors that the high point for eurozone borrowing costs has been reached, following 10 back-to-back moves starting in July 2022.

That’s fuelling bets on when the first rate cuts will arrive, with investors buying into ECB’s “higher-for-longer” narrative by pricing reductions from next June — even as the region is at risk of finally succumbing to a recession.

Officials aren’t offering many clues, with several focusing instead on other policy levers like the PEPP. Tweaks there could prove controversial, though, as Middle East tensions threaten to push oil prices higher, Italy’s government finances worry investors, and the euro area’s economy wobbles amid higher credit costs.

“As is often the case with monetary policy, there is this transmission lifetime,” Lagarde said. “The assessment by our staff is that there is still more in the pipeline, and more to come to affect the real economy. And the assumption is that it will continue to unfold throughout the end of 2023 and first quarter of 2024.”

The ECB’s announcement is part of a slew of global rate meetings. On Wednesday, the Bank of Canada kept rates unchanged for a second straight time, while leaving open the possibility of more tightening. Next week will feature decisions by the US Federal Reserve and the Bank of England. Both are expected to hold fire.

Since their last policy gathering in September, ECB officials have seen inflation slow more than anticipated. It could abate to a two-year low of about 3% this month, according to a Bloomberg Economics estimate.

But while the surge in rates is benefiting lenders like Deutsche Bank, third-quarter gross domestic product numbers for the 20-nation eurozone, due next week, are likely to show meagre growth at best. Surveys of purchasing managers for October signalled that both the manufacturing and services sectors are mired in downturns.

Germany, the currency bloc’s largest economy, is also its biggest concern, as it faces the prospect of a second recession in just over a year. ECB policymakers will have to wait until December for fresh staff projections that will look all the way into 2026.

Lagarde warned that growth risks remain skewed to the downside.

“The economy is likely to remain weak for the rest of this year,” she said. “But as inflation falls, further household real incomes recover and demand for euro-area exports picks up, the economy should strengthen over the coming years.”