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ECB keeps interest rates unchanged, sticks to data-dependent approach

President of European Central Bank Christine Lagarde speaks in the panel "The Global Economic Outlook" on the last day of the forum's Annual Meeting in Davos, Switzerland.
President of European Central Bank Christine Lagarde speaks in the panel "The Global Economic Outlook" on the last day of the forum's Annual Meeting in Davos, Switzerland. Copyright Markus Schreiber/Copyright 2024 The AP. All rights reserved
Copyright Markus Schreiber/Copyright 2024 The AP. All rights reserved
By Piero Cingari, markets analyst
Published on Updated
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As expected, the European Central Bank kept rates unchanged at its January meeting, despite increasing calls for monetary loosening.

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The European Central Bank (ECB) has announced it is to keep its key interest rates steady, The decision taken at its January policy meeting was widely expected. The main refinancing rate will stay at 4.50%, with the rates for the marginal lending facility and deposit facility holding at 4.75% and 4.00% respectively. The decision underlines the ECB's cautious approach amid economic uncertainties.

Stability was also echoed in the ECB's asset strategies, as there were no adjustments to the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP). The APP's portfolio is set to diminish at a steady pace, with no reinvestment of maturing securities. The PEPP, on the other hand, is preparing for a gradual reduction at an average of €7.5 billion monthly, starting from the latter half of 2024, with a full phase-out of reinvestments by the year's end.

The ECB's official statement highlighted that "declining trend in underlying inflation has continued", attributing this trend to the dampening effect of high-cost capital on demand, which in turn mitigates inflationary pressures.

December saw a slight rise in eurozone inflation to 2.9% year-on-year, up from November's two-year low of 2.4%. The rise, primarily attributed by energy price fluctuations, marked the first inflation increase since April 2023.

ECB remains data-dependent when it comes to inflation

The ECB's Governing Council is resolute in steering inflation back to its 2% medium-term objective and claimed that interest rates must stay sufficiently restrictive to achieve this goal.

Thus, the ECB has not signalled any upcoming policy easing, underlining its satisfaction with the prevailing interest rate levels.

The ECB's policy trajectory remains firmly data-dependent, promising to adapt its level and duration of monetary restriction based on incoming economic indicators.

This stance comes against a backdrop of contracting private sector activity within the eurozone, as January's flash estimates from the HCOB PMI fell short of expectations, painting a picture of an economy facing headwinds.

"The euro area economy is likely to have stagnated in the final quarter of 23. The incoming data continue to signal weakness in the near term," Lagarde said in her opening remarks.

For now, the message is clear: stability is paramount as the ECB navigates through the choppy waters of a weakened economy with the enduring goal of price stability.

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