News broke a fortnight ago that the European Central Bank (ECB) is likely to keep interest rates in the eurozone at the current high level for at least one year. Klaas Knot, president of De Nederlandsche Bank (DNB), said this in an interview with news agency ANP.
 

Interest break

News broke yesterday that the European Central Bank has decided not to raise interest rates. Since June 2022, the ECB has raised interest rates time and again to reduce sharply rising inflation. As a result, the deposit rate went from - 0.50 per cent to 4 per cent.
 
The decision was taken not to raise interest rates further to see what effect the combined 10 interest rate hikes would have on the economy and inflation. ING economist Bert Colijn said it is ‘good news for the ECB that the policy seems to be working, but the bad news is that by definition this means the economy is doing significantly worse.’
Also read: “ECB verhoogt rente, wat betekent dit voor de goudprijs?“
 

Weak demand for products and services

It remains difficult for companies to pass on higher energy prices and strong wage growth to customers, due to weak demand for products and services. As a result, inflation fell to 4.3% in September from 10.6% in the eurozone a year ago. 
 

Inflation by target

However, it remains unclear when interest rates will go down again. Deutsche Bank's Mark Wall said that ‘only by keeping interest rates at current restrictive levels for a sufficiently long time can one be sure that inflation will return to its target level. The question is: how long is sufficiently long?’
 
It is expected to take until 2025 for inflation to return to the 2% target. For this reason, it was decided to leave interest rates at current levels for an extended period. This decision was unanimous according to ECB president Christine Lagarde.
 
Analysts do not expect the ECB to cut interest rates until September 2024. They then expect three consecutive cuts of 25 basis points, bringing interest rates to 3.25 per cent by the end of 2024. In addition, they expect a policy rate of 2.50 per cent by the end of 2025.
 

Crisis built up bond portfolios

Asked what the ECB will do with its bond portfolios accumulated during crisis, Lagarde said there has been no change in this position. She added that this has not been a point of discussion.
Reinvestment in expiring loans from the pandemic programme will continue until at least the end of 2024.
 

Capital market rates

Lagarde also briefly addressed the rising capital market interest rates seen recently in the United States and Italy. On this, she indicated that this is ‘a movement that has come from outside the eurozone and does not directly touch on underlying factors in the eurozone.’
High interest rates have a tightening effect, according to Lagarde, and it is one of the components that factors into interest rate policy decisions.
 

Transmission Protection Instrument

Asked at what interest rate differential the ECB is ready to intervene if interest rates in Italy rise too much, Lagarde said, ‘We also need to make sure that monetary policy works through well in all euro countries and have the tools to make sure it does.’
The ECB has the Transmission Protection Instrument for this purpose. It allows the ECB to buy up bonds of euro countries under conditions if that country's interest rates rise harder than is justified on economic grounds in the eyes of the ECB.
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Conclusion

The ECB is opting for an interest rate pause to see what effect rate hikes have on the economy and inflation. However, the question is when interest rates will go down again. Analysts expect this not to happen until September 2024 and expect a policy rate of 2.50 per cent by the end of 2025.
 
Disclaimer: The Silver Mountain does not provide investment advice and therefore this article should not be considered as such. Past results do not guarantee future results.
 

Source

BNR Webredactie en Thijs Baas. ECB trapt op de rem: geen nieuwe renteverhoging. BNR, 2023.
RTL Z. KNOT: rente blijft nog jaar hoog (dus die voor hypotheek en sparen ook). RTL nieuws, 2023.
ECB. Monetairbeleidsbeslissingen. Europese Centrale Bank, 2023.
Marcel de Boer en Arend Clahsen. ECB drukt pauzeknop in, rente blijft 4%. FD, 2023.