The European Central Bank (ECB) maintained interest rates unchanged at a pivotal meeting in Athens after 15 years, marking an end to a series of ten consecutive rate hikes. Since July 2022, the ECB had increased rates by 4.5 percentage points to tackle inflation. However, as record high borrowing costs began impacting the economy and inflation pressures started to alleviate, the ECB hinted at a pause last month. This development has led market participants to anticipate an end to rate hikes and foresee a rate cut as the ECB's next step.
This decision strengthens the perspective that major global central banks, including the U.S. Federal Reserve, have wrapped up their policy tightening phase, thus ending synchronized rate hikes. This shift has redirected market focus towards the duration for which these high rates need to be maintained. Investors are now predicting a rate cut as early as June.
The ongoing Middle East conflict and subsequent rise in energy costs could maintain inflation pressure even as growth slows down, potentially leading to stagflation - a harmful phase where inflation remains high while growth stagnates. The economic outlook is becoming increasingly uncertain, posing a threat to a "soft landing."
The ECB's deposit rate continues to stand at a record high 4%, with the main rate at 4.5%. Market watchers are now keenly awaiting ECB President Christine Lagarde's forthcoming news conference where she may address potential early reductions in bond holdings in the bank's €1.7 trillion ($1.8 trillion) Pandemic Emergency Purchase Programme (PEPP). These reinvestments, committed through 2024, serve as the ECB's "first line of defence" for vulnerable euro zone economies against unwarranted market volatility.
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