With speculators roughly split between another tightening and no change, the ECB today announced that for a tenth time in as many meetings, key interest rates will be hiked again - by a further 25 basis points. This puts the key deposit rate at a new record high of 4.0 percent, the refi rate at 4.50 percent and the rate on the marginal lending facility at 4.75 percent. Cumulative tightening delivered since July 2022 now stands at some 450 basis points. Crucially however, the central bank also issued a form of forward guidance that states the"Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target."

In terms of QT, there were no changes. In particular, the €1.7 trillion pandemic emergency purchase programme (PEPP) remains protected with maturing assets being fully reinvested until at least the end of 2024. The hawks were hoping to bring the PEPP into the QT fold. At the same time, the longstanding asset purchase programme (APP) will continue to be run down as assets role off the balance sheet although outright sales (active QT) are still not being considered.

Justification for today's move is provided in the updated economic forecasts which show inflation averaging 5.6 percent this year, 3.2 percent in 2024 and 2.1 percent in 2025. Core rates for the same period are 5.1 percent, 2.9 percent and 2.2 percent respectively. In other words, inflation is still seen above the 2.0 percent target over the projection horizon. That said, growth forecasts have been trimmed significantly and GDP is now expected to rise just 0.7 percent this year, 1.0 percent in 2024 and 1.5 percent in 2025.

Today's decision did not meet with universal approval from the Governing Council (GC) members. In recent weeks, the hawks have been particularly vocal about the need to tighten further while others have clearly wanted at least a pause. Indeed, the hawks probably only got their way by accepting the forward guidance that, while not guaranteeing that the tightening cycle has concluded, greatly increases the likelihood that key interest rates have finally topped out. The inflation data in September/October will now need to be very poor for rates to be raised again at the next meeting in November. Still, the other message implicit in the September policy statement is that any cut in interest rates is some way off.

Overseas, today's move by the ECB is unlikely to have much impact on the BoE and SNB policy decisions next week. However, for the SNB, a unilateral hike in its benchmark rate might have triggered an unwelcome spike in the Swiss franc. Consequently, at least at the margin, the ECB's latest tightening has probably increased scope for the SNB to follow suit.

After hiking rates nine straight times, the European Central Bank is expected to step back and leave rates steady. Yet the outlook isn't unanimous with some looking for a 25 basis point hike and even a few for a 12.5 point hike.

The European Central Bank (ECB) sets monetary policy for all members of the Eurozone. The highest decision-making body is the Governing Council which comprises the six members of the Executive Board and the nineteen presidents of member central banks. Policy meetings take place roughly every six weeks but, due to the sheer number of participants, a rotation system has been introduced so that the total number of votes is capped at twenty-one. The benchmark interest rate is the rate on the main refinancing operations (refi rate) which sits between the marginal lending facility rate and deposit rate. The ECB's primary objective is price stability which since July 2021 is based upon a symmetric 2 percent target for the annual inflation rate.

The European Central Bank determines interest rate policy at their Governing Council meetings. The Council is composed of the six members of the Executive Council and 17 presidents of member central banks (Bank of France, Bundesbank, etc). The Governing Council meets now meets every six weeks. The European Central Bank had an established inflation ceiling of just less than 2 percent which was modified in July 2021 to 2 percent. The ECB's measure of inflation is the harmonized index of consumer prices (HICP). Each member of the Governing Council has one vote and decisions are reached by simple majority. In the event of a tie, the President has the casting vote. Only short-form minutes are released so how individual members voted is not known.

As in the United States, European market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on European markets can be dramatic and far-reaching. The rate set by the ECB serves as a benchmark for all other interest rates in the Eurozone.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.