ECB keeps rates unchanged again

As widely predicted, the ECB’s Governing Council kept its key interest rates unchanged at its meeting on 14^th December, insisting it would keep borrowing costs at “sufficiently restrictive levels for as long as necessary”. However, after ten back-to-back increases in the cost of borrowing in the space of less than a year, some governing council members are raising the prospect that the peak of the tightening cycle has been reached. Isabel Schnabel, a hawkish member of the Governing Council, interviewed on 5^th December appeared to dismiss the possibility of further rate hikes, commenting that the recent slowdown in inflation made further hikes “rather unlikely”. This was despite ECB president Christine Lagarde’s insistence that there was “more work to be done” in the inflation battle, and any talk of the timing of rate cuts was premature. Furthermore, the timetable for running off assets purchased under the Pandemic Emergency Purchase Programme (PEPP) has been brought forward. Initially, maturing assets were to be reinvested until the end of 2024. Now, in the second half of next year the PEPP portfolio will be reduced by €7.5b. per month on average and further PEPP reinvestments will be discontinued at the end of 2024.

Schnabel;’s interview came in the wake of consumer price inflation falling to 2.4% in the year to November, the lowest rate of increase since July 2021. Nonetheless, in spite of Schnabel’s strong hints that the peak of the tightening cycle has been reached, the policy decision statement issued after the Governing Council Meeting predicted a rise in inflation, with 2024’s average figure estimated at 2.7%, before falling to 2.1% in 2025.

This figure looks rather high in the light of the recent money numbers. In October, the quantity of broad money in the Eurozone declined by €45b. This marks a resumption of M3’s downward trajectory after an increase of €73b. in September. The annualised quarterly growth rate turned positive for the first time since November 2022, although the annualised growth rate remains negative. Demand for new bank credit remains very weak. The value of new loans to businesses declined by 0.9% in the year to October while new mortgage lending increased by a paltry 0.3%, a sharp contrast to the more robust 5% growth rates common in 2022. 

Eurozone GDP stagnated in the third quarter of the year and data for October does not suggest any improvement. The retail sector continues to see sales fall on both an annual and a monthly basis, suggesting that little surplus cash now remains in the economy after the splurge of 2020-22. This shift is likely to trigger a further weakening in consumer demand. Although the ECB has deliberately set out to dampen demand as part of its policy approach, there appears to be a lack of recognition regarding the extent of the contractionary impact of its current monetary policies. The latest monetary statistics lend further weight to the previous forecast made in these notes that the Eurozone may well be heading towards a recession in 2024.