ECB increasingly comfortable on hold
The ECB kept its key policy interest rates steady for the third successive meeting and its commentary suggested that it is increasingly comfortable maintaining this policy stance going forward.
Of course, this comes with the usual caveat that if the outlook changes, the ECB would react. Indeed, President Christine Lagarde noted that the ECB was in a ‘good place’ it was also not a ‘fixed place’ and that the ECB would do what is needed. However, on the basis of the central bank’s current outlook for inflation and the risks around it, it is clearly very comfortable.
Although in its September projection the ECB saw inflation remaining below target for a long period, it did expect inflation to converge back to target by the end of 2027, and it seems to regard this as the policy relevant horizon. Data since that update, lead the Governing Council to conclude at today’s meeting that the ‘inflation outlook is broadly unchanged’ and indeed the decision to hold rates was taken with ‘absolute unanimity’.
The Council’s comfort with the current stance is being encouraged by easing downside risks to the economic outlook given resilient data but also the ‘announcement of progress in the US-China trade negotiations’. Indeed, in September the ECB already made a shift to recognise that risks were ‘more balanced’, while they had previously been on the downside. In the October statement, it listed downside and upside risks to growth without giving any assessment of the skew, suggesting that the ECB sees the risks as being balanced. However, it did still note that the environment for both growth and inflation was more uncertain than usual ‘on account of the still volatile global trade policy environment’. Our base case remains that the ECB will keep interest rates on hold during our forecasting horizon.