ECB meeting today, rates stuck at 4.50%? What to expect

The ECB meeting today, Thursday 26 October, promises to be crucial and the anticipation of investors and analysts is rising for the decision of Lagarde and other officials on interest rates.
The context is very complex at a global level and even more so for the Eurozone.
The war in Israel is the new, unforeseen factor that has suddenly added to the already known reasons for concern for the European region, focused above all on the arrival of a recession.
With gas and oil prices rising again and hindering the restrictive monetary policy strategy pursued so far, the watchword for the ECB will be prudence.
On the one hand, in fact, a pause in the rise in rates is called for, with the reference interest rate reaching 4.50%.
On the other hand, an overly dovish message could delude oneself about the end of the risks for inflation, which is instead finding new pressure to increase with the ongoing geopolitical turbulence.
Lagarde's press conference, which as usual will follow the rate decision, is the most watched economic event of the week.
What to expect from today's ECB meeting, Thursday 26 October 2023 and what can happen in the Eurozone.
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And for Italy, ECB meeting today, 26 October: is it time for a break for rates? Uncertainty remains high even among economists' forecasts.
In general, the ECB has signaled a possible pause and the markets are not pricing in further rate increases.
It is difficult, however, to completely rule out another increase.
Lagarde may stick to the “high-for-long” mantra that has pushed long-term bond yields higher.
Meanwhile, a weakening economy suggests the need for further tightening is limited, but the central bank is still likely to dismiss speculation about a rate cut.
The forecast of ING experts is “no further rate increases and first cut in summer 2024.” The explanation for this estimate was summarized as follows: “The official comments from the European Central Bank (ECB) after the September meeting and the rate hike suggest that the ECB has not yet finished its rate hike cycle.
However, we expect the Eurozone economy to weaken further and faster than the ECB currently predicts.
Combined with higher disinflation until the end of the year, there will be very little argument for further rate hikes at the meetings in late October and early December.” Swap prices show a pause from the European Central Bank this week, with only a 10% chance of a 25 basis point increase at a subsequent meeting.
Ales Koutny, head of international rates at Vanguard, agrees with market pricing suggesting the ECB will keep rates unchanged on Thursday, but says traders are too complacent about the possibility of further tightening in the coming months.
read also The war in Israel has put the Fed and the ECB in trouble.
Now anything can happen.
The signals that are arriving from the economic and geopolitical context are in fact conflicting.
ECB chief economist Philip Lane says the ECB will need time, perhaps until next spring, before it can be confident that inflation is falling.
According to ING strategists, in fact, a more resilient Eurozone economy, combined with the impact of the recent increase in oil prices, could easily push Lagarde and the board to opt for at least one further increase before the end of the year.
The ECB is clearly also concerned about its credibility in the fight against inflation and the fear of an unanchoring of inflation expectations.
It should also be considered, according to analysts, that the amount of money circulating in the euro zone fell to the highest levels ever recorded in August, when banks curbed lending and depositors froze their savings.
The ECB will likely examine this and other signs of tightening financing conditions.
The surge in US Treasury bond yields has dragged up European financing costs, supporting the need not to make further increases.
How worried is inflation? Lagarde's words in the press conference will also be important to understand how much inflation still worries us as a destabilizing factor for the Eurozone.
European gas prices have risen 35% so far this month, oil is above $93, threatening to push inflation higher again.
As an energy-importing region, Europe is more vulnerable than the United States to a spike in inflation caused by tensions in the Middle East, said Chris Jeffrey of Legal & General Investment Management.
According to him, Lagarde would like not to be "dragged" into the discussion on energy prices until it is clearer whether the race will be sustained.
UBS's Cluse said energy prices are not a turning point in the inflation outlook because strong disinflationary base effects are in place.
The ECB expects overall inflation to fall to 3.2% in 2024 from an average of 5.6% in 2023.
However, the warning is there.
“We definitely believe that the ECB should raise rates more.
Inflation is not yet under control,” commented Colin Graham, head of multi-asset strategies at Robeco.
The threat does not only come from the potential effects of war in the Middle East with possible surges in energy prices.
Also in focus are the recovery of China, which can put pressure on the demand for raw materials and a crisis in the supply of other commodities, such as food such as rice.
Price effects can easily become global.
read also Has the ECB finished raising rates? What to expect Will there be space for Quantitative Tightening at the ECB meeting? The ECB is not expected to start active sales of balance sheet-reducing bonds anytime soon, according to Reuters experts.
The debate instead focuses on whether to bring forward the final date of December 2024 for reinvestments of the Pandemic Emergency Purchase Program (PEPP).
The increase in yields on Italian government bonds could cool rumors about a rapid end to this instrument and a more determined start to Quantitative Tightening.
Under the PEPP, reinvestments can be directed to the countries most in need.
Lagarde said this is the first line of defense against fragmentation, the excessive widening of yield spreads that reduces the effectiveness of monetary policy.
“We will not make a decision on PEPP reinvestments after the recent rise in (Italian) yields,” UBS chief economist Reinhard Cluse said.
“The market is still a bit nervous…
The ECB doesn't want to add fuel to the fire”.
A decision could come in December or early 2024, he added.