European Central Bank left interest rate unchanged at a meeting today. New set of forecast pointed to a slower headline and core inflation in 2023 and 2024 as well as lower GDP growth. Core inflation is not expected to drop to 2% target over the forecast horizon (through 2026). PEPP reinvestments are expected to slow in the second half of 2024 and stop by the end of the next year.
ECB President Lagarde began post-meeting press conference at 1:45 pm GMT. Below key takeaways.
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- Inflation is expected to decline gradually over the course of next year
- Governing Council intends to discontinue PEPP reinvestment by the end of 2024
- Tighter financing conditions are likely to weight on the economy
- Services activity to soften in coming months
- Prospects are especially weak for construction and manufacturing
- Labor market continues to support the economy
- Fiscal policies should make economies more productive and bring down high public debt
- Inflation decline in November was broad-based
- December inflation likely to pick-up on base effect
- Inflation to slow more slowly in 2024 on base effects
- Most measures of longer-term inflation expectations currently stand at around 2%
- Risks to growth are skewed to the downside
- Risks include geopolitics, global economic weakness
- Upside risks to inflation include geopolitics
- Upside risks to inflation also include wages and profits
- Downside risks to inflation include economic dampening
- Markets interest rate have come down significantly since the previous meeting and are below rates embedded in staff projections
- Financial stability outlook remains fragile
- Determined to return inflation to 2% in timely manner
Q&A session
- ECB is data-dependant, not time dependent
- Path to inflation target is flatter than it was before
- Seeing a strong transmission to financing of economy
- We should not lower our guard
- Domestic inflation is hardly budging
- We need more data on resistance of domestic inflation
- Need inflation data to get clearer picture
- Wage data we have now isn't declining
- Need more information on unit profits
- We don't have evidence of sustainable slowdown yet
- Everyone on Governing Council was fine with stopping PEPP reinvestments at end-2024
- PEPP adjustment is balance sheet normalization
- PEPP timetable unrelated to interest rates
- We didn't discuss rate cuts at all (EUR jumps)
- We will be data dependant on rate path
- Energy support must be withdrawn by governments
- ECB will get a lot of data in first half of 2024
- We believe that there is still work to be done
- Don't have a recession in our baseline forecast
EURUSD gained during the ECB post-meeting press conference. Source: xStation5
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