LONDON, Feb 5 (Reuters) – The European Central Bank left interest rates unchanged as expected on Thursday, shrugging off a dip in inflation while continuing to warn about an uncertain geopolitical environment.
The euro hovered around $1.18, unchanged on the day . Government bond yields across the euro area were largely flat, with Germany’s benchmark 10-year bond yield edged down 1.4 basis points to 2.849%.
The pan-European STOXX 600 index slid, falling 1% from Wednesday’s close.
At a press conference following the decision, central bank President Christine Lagarde said the outlook for inflation was more uncertain than usual and that a stronger euro could lower price pressures by more than policymakers currently expect.
COMMENTS:
MARK WALL, CHIEF EUROPEAN ECONOMIST, DEUTSCHE BANK:
“This is one of those occasions when central banks need a good sense of balance to weigh the negatives against the positives. Leaving policy rates unchanged feels the right thing to do. There are external vulnerabilities, but there is also domestic resilience, helped in part by Germany’s defence and infrastructure spending.”
DANIELE ANTONUCCI, CHIEF INVESTMENT OFFICER, QUINTET PRIVATE BANK:
“The euro’s recent rise against the dollar has revived concerns about imported disinflation, especially as headline inflation dipped to 1.7% last month on the back of lower energy costs.
Even so, policymakers appear comfortable with the balance of forces for now: on a trade‑weighted basis the euro has eased slightly, longer‑term inflation expectations remain broadly anchored, and firmer wage and lending data point to ongoing domestic strength.”
“For now, the central bank maintains a steady hand. Policy remains in what President Lagarde calls a ‘good place’, but with the flexibility to respond if the balance of risks shifts.”
CARSTEN BRZESKI, GLOBAL HEAD OF MACRO, ING:
“‘No need to change.’ This is what the European Central Bank must have thought at today’s meeting, as it just announced its decision to keep interest rates where they are. The official policy announcement also illustrates that the ECB still sits comfortably in its ‘good place’. And, with the eurozone expected to grow at around potential and inflation to remain somewhere around 2%, there are very few arguments for challenging the ECB’s good place.”
“Looking ahead, if the ECB were to leave its good place, any first move would be a cut, not a hike – at least in the near term. Whether it is general market unease or, more specifically, the strengthening of the euro, there is still a risk of inflation undershooting over the coming months.”
FELIX FEATHER, ECONOMIST, ABERDEEN
“We think the disinflationary impulse from a stronger euro relative to the ECB’s prior expectations will be relatively modest. The recent move in the euro against a broad trade-weighted basket of goods has not been particularly sharp, and pass-through to consumer prices tends to be fairly mild.
All considered, we are sticking to our on‑hold‑through‑2026 call.”
TOMMY VON BRÖMSEN, FX STRATEGIST, HANDELSBANKEN:
“The initial take is that this was obviously expected among forecasters as well as the market, so there’s not much moving in the wake of this.”
“We think the ECB is in a good place now with monetary policy and most people agree with that, not least the ECB.”
“We expect them to be on hold for the rest of the year. Something new will have to happen for them to change trajectory, either up or down.”
ANDREW KENNINGHAM, CHIEF EUROPE ECONOMIST, CAPITAL ECONOMICS:
“Looking ahead, we think the next interest rate move is likely to be a cut as we suspect that economic growth will disappoint and core inflation will fall below 2% and remain there in the second half of the year. We have pencilled in two 25bp rate cuts, for September and December this year, taking the deposit rate to 1.5%.”
BARRY VAN DER LAAN, SENIOR FX STRATEGIST, MONEX EUROPE:
“We have to wait for the press conference… Everybody was saying that the ECB could be on hold for the remainder of the year. We had some rumours that the next move could be a hike as well.
“Yet inflation continues to skew to the downside… well below 2%. And at the same time we see that the European boost we’re all waiting for is not going as well as expected. And on top of that we see the dollar continues to weaken. If we are looking at $1.22 then the ECB gets uncomfortable (about lower than expected inflation).
“We are looking at the possibility of a rate cut if all these things come together. I look for a bit of confirmation of that from Lagarde, I expect her to say that we are looking at every scenario but if necessary then we are ready to act.
“But our base case remains they remain on hold for at least the third and the second quarters.”
MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS:
“The ECB keeps interest rates on hold and sticks to its ‘steady for longer’ forward guidance. Of course, beyond the central message, there is plenty for the ECB to focus on, including the strength of the currency, commodity prices, and U.S. policy – subjects which will undoubtedly come up at Lagarde’s press conference.”
IRENE LAURO, SENIOR ECONOMIST, EUROPE AND CLIMATE, SCHRODERS:
“Euro zone growth continues to outperform expectations, with domestic demand gaining momentum as lower interest rates and fiscal support filter through the economy.
“Yes headline inflation has dipped below target, but the ECB will largely look through this given the volatility in energy prices. Instead, policymakers will remain focused on services inflation, which is still running uncomfortably high and set to be exacerbated by the expected end of the slowdown in wage growth this year.
“Today’s decision has confirmed our view that the next move from the ECB will be up, rather than down.”
(Reporting by the Reuters Markets Team; Compiled by Dhara Ranasinghe; Editing by Amanda Cooper)
Comments