The European Central Bank (ECB) kept its key policy rates on hold today for the second consecutive meeting. The interest rate on the main refinancing operations, the marginal lending facility, and the deposit facility remain at 4.5%, 4.75% and 4.0%, respectively.

While the policy decision will not have come as a shock to markets, the ECB’s still-hawkish tone will likely come as a bit of a surprise. The policy statement delivered the key message that rate cuts are not yet on the agenda via two clear phrases: “Key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal” and “policy rates will be set at sufficiently restrictive levels for as long as necessary.”

Balance sheet normalization

The ECB also made an announcement with regards to balance sheet normalization. Pandemic emergency purchase programme (PEPP) portfolio reinvestments will continue in full in the first half of 2024, but will be essentially cut in half during the second half of 2024. By the end of next year, the central bank is expecting to fully discontinue reinvestments. Lagarde went to pains to emphasize that their decision is entirely unrelated to their policy rate cut timetable and is instead simply because there is no longer any need for an “emergency program.”

Economic forecasts

The ECB published its updated full-year average staff projections. GDP growth was generally revised slightly lower:

  • 2023: 0.6% (decline from 0.7% in September)
  • 2024: 0.8% (decline from 1%)
  • 2025: 1.5% (unchanged)

The inflation outlook also saw some downward revisions:

  • 2023: 5.4% (decrease from 5.6% in September)
  • 2024: 2.7% (decrease from 3.2%)
  • 2025: 2.1% unchanged
  • 2026: 1.9% (new forecast)

Central bank pivots

Following the Federal Reserve’s dovish shift yesterday, where Chair Jerome Powell had admitted that rate cuts were discussed by the committee, markets were expecting a similarly dovish stance from the ECB. That was not the case. The ECB failed to emulate the Fed, instead choosing more hawkish wording for its statement, with ECB president Christine Lagarde clearly noting that rate cuts had not been discussed during their meeting. She provided two clear reasons why the ECB “should not lower their guard”:

  1. Their inflation outlook, which sees inflation only falling close to the 2% target in 2025, is conditioned on the interest rate path that was embedded in market data on November 23, 2023. At that time, markets were pricing in a 75-100 bps drop in policy rates next year. Her point is presumably that, if their forecasts were instead conditioned on current market pricing, which coming into today’s meeting were seeing an even larger drop of around 150-175 bps next year, the inflation path would be higher and it would take longer to hit the 2% target.
  2. Although broad measurements of underlying inflation have fallen considerably, she highlighted that domestic inflation—which is largely driven by wage growth—has not yet budged. Only once they have sufficient evidence that wage growth is decelerating could they feel comfortable with rate cuts.


Lagarde did a forceful job in pushing back against expectations for imminent rate cuts. The ECB retains enough inflation caution to tread very carefully around pivot expectations and will likely only signal rate cuts once it has sufficient confidence about the inflation outlook.

Yet, despite her best efforts, markets are not entirely buying the hawkish stance. Indeed, with the Euro area likely to only just skirt recession, the growth outlook should continue to apply downward pressure to inflation—even domestic inflation. So, the ECB’s data dependency, rather than “time dependency,” will itself likely argue for monetary easing during 2Q 2024—a pivot in all but name.

Macro views

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