Morning Market Brief: January 19, 2024

ECB likely to keep rates higher for longer?

At its last meeting of 2023, the European Central Bank (ECB) held its policy interest rate steady at 4.50%. The ECB believes its rate is at a restrictive level, which is helping to pull down inflation. While markets are expecting the ECB to begin reducing interest rates in the first half of 2024, the central bank appears to be pushing back on this sentiment.?

• The ECB released the minutes to its last meeting, which was held on December 14, where it held its policy interest rate at 4.50%. The minutes showed officials believe this rate is at restrictive levels, which has helped to moderate demand and pull down inflation.
• ECB officials appear divided on the timing of interest-rate cuts. ECB officials still see inflation as a risk and believe restrictive rate levels are needed to help bring inflation down to their 2% target.
• ECB officials also expressed concern that market expectations could hinder their path to bringing down inflation. With market expectations growing that the ECB could soon begin cutting interest rates, bond yields have fallen sharply while equity markets were robust. In response, the minutes and recent comments from ECB officials appear to be tempering expectations for a rate cut in the first half of 2024.
• Interest rates are expected to stay higher for longer. The notes showed officials believe current interest rates still have room to impact the European economy, while inflation is expected to remain at elevated levels over the next couple of years.

Despite comments pointing to higher rates for longer and a strong likelihood of no interest-rate cuts in early 2024, the ECB appears to be setting the stage to begin cutting rates in the second half of 2024. Most of the central bank’s pushback stems from its hope that those expectations don’t impact financial markets and derail the fight against inflation. Inflation has been trending downward in Europe, but the increased rate in December shows the battle isn’t going to be easy.

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