Governing Council meeting, ECB 26/10/2023

Governing Council meeting, ECB. 26^th October 2023

 ECB keeps rates unchanged after 10 consecutive hikes

As widely predicted, the ECB’s Governing Council kept its key interest rates unchanged at its meeting on 26^th October. This follows on from ten back-to-back increases in the cost of borrowing in the space of less than a year. The main refinancing fixed rate therefore remains at 4.5% – a 22-year high.  

In the press conference following the meeting, ECB President Christine Lagarde expressed her hope that the cumulative effect of the rate rises would be sufficient eventually to bring inflation down to the ECB’s 2% target, although she expressed concern that inflation was still expected to stay too high for too long. Consumer price inflation fell from 5.3% in the year to August to 4.2% in September while the core inflation rate (excluding food and fuel prices) fell from 5.3% to 4.5% and prices at the factory gate (the producer price index), which first turned negative in May, fell by no less than 11.6% in the year to August, the steepest drop on record.

In September, the quantity of broad money in the Eurozone rose by €73b., the most substantial monthly increase in M3 in a year. Indeed, most months of 2023 have seen a decline in M3 and the annual growth rate remains negative (-1.2%) although the annualised quarterly growth rate moved out of negative territory  - admittedly, only to 0.0% - for the first time in ten months. This broad money growth has not been triggered by new demand for credit from households. Mortgage lending increased by only 0.2% in the year to September, the weakest growth for several years. Businesses likewise are showing little enthusiasm to take out new bank loans. The upturn in Broad money has come about through an increase in “banks’ holdings against central government”- in other words, monetization of government debt.

The stock market continues on its downward trend, having fallen by more than 10% from July’s peak. Geopolitical events such as the situation in Israel and Gaza are unquestionably dampening sentiment, but even without these factors, GDP growth predictions across the 20-nation bloc are extremely modest and hardly inspiring for investors. Indeed Eurozone GDP may fail to grow even by the ECB’s predicted rate of a very modest 0.7% in 2023. Moreover, the money numbers in the past year suggest that the Euro area is very likely to face a recession in 2024. Only the overhang of excess money created in 2020-22 has staved off recession this year and evidence from the retail sector, which is seeing sales fall on both an annual and a monthly basis, suggests that little surplus cash now remains in the economy. This will result in further weakening of demand and a more rapid drop in inflation than the ECB is expecting. In fact, the scale and speed of the contraction suggested by the money numbers make it likely that the ECB will start to reduce the cost of borrowing sooner than it currently anticipates.