Rates Remain on Hold

The European Central Bank (ECB) claimed the spotlight in recent trading and held all three key benchmarks unchanged; the main refinancing operations rate, the marginal lending facility rate, and the deposit facility rate remain at 4.50%, 4.75% and 4.00%, respectively. This did not raise too many eyebrows as both markets and economists widely expected the central bank to hold the line today.

Rate Statement

The accompanying rate statement communicated that ‘financial conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation. But domestic price pressures are strong and are keeping services price inflation high’.

Additional notes seen from the statement:

• ‘Inflation has continued to fall, led by lower food and goods price inflation’.

• ‘The Governing Council’s future decisions will ensure that its policy rates will stay sufficiently restrictive for as long as necessary’.

• The central bank will continue to follow a ‘data-dependent and meeting-by-meeting approach’.

• The ECB is not ‘pre-committing to a particular rate path’.

Following the hold decision and release of the rate statement, the EUR traded to a low of $1.0715 against the USD, but the move was short-lived as traders awaited ECB President Lagarde’s comments.

It was likely the following statement passage that triggered an immediate sell-off in the EUR against its peers, particularly the sentences in bold:

The Governing Council’s future decisions will ensure that its policy rates will stay sufficiently restrictive for as long as necessary. If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.

ECB Press Conference

Thirty minutes following the rate announcement/rate statement, ECB President Lagarde took the stage.

The event was a lot less dovish than market participants were expecting and Lagarde did not offer much to get our teeth into. The EUR/USD exchange rate was a touch higher during the presser, presumably on the back of a lack of dovish cues.

There were a number of questions regarding the ECB and the Fed’s connection. Lagarde reaffirmed that the central bank is data-dependent and made clear in her first question/answer that the ECB is not Fed-dependent. The ECB head emphasised the point that the bank is also not pre-committed on a particular path in terms of rates.

So, really, the presser was a whole lot of nothing, and this was displayed in the markets. The expectation heading into the event was for the ECB to open the doors to a June rate cut, but this was clearly not the case. The central bank essentially indicated that they will wait until June’s policy meeting (of note, economic projections are updated at this meeting). The ECB is ultimately looking for more progress on inflation—the next Final release will be available on 17 April, with the next Flash figures released on 30 April.