For the first time in some 11 meetings, the ECB today announced no change in key interest rates. The decision, which was widely expected, leaves the deposit rate at September's 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. It also means that the cumulative tightening delivered since July 2022 remains at a hefty 450 basis points. Crucially too, the central bank retained last month's 'soft' forward guidance which said that"…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."

However, as this week's ECB lending survey made clear, steady official interest rates do not mean that the overall policy stance is not being made more restrictive. For a start, 10-year bund yields are up around 17 basis points since the September meeting, meaning that financial markets have already delivered some additional tightening. Moreover, net asset sales under the QT programme have accelerated since the abandonment of partial reinvestment at the end of June and the phasing out of the longer-term refinancing operations (TLTRO III) is further draining liquidity. The €1.7 trillion pandemic emergency purchase programme (PEPP) still resides outside of QT, but calls for its inclusion are becoming more vocal. Consequently, the full reinvestment policy presently due to run until at least the end of next year could well be brought forward soon.

That said, the increase in bond yields has been particularly apparent in the more indebted member states and the ECB will be alert to the recent widening in the spread between 10-year Italian BTPs and bunds. At currently just over 200 basis points, the gap is large enough to prompt caution about any further step-up in the pace of asset sales.

The ECB still expects inflation to stay too high for too long, and domestic price pressures remain robust. Still, the overall tone of today's statement probably slightly increases the likelihood that ECB interest rates have peaked, albeit with upside risk. To this end, next week sees the flash October HICP report, a key indicator ahead of the next and last meeting of 2023 in December.

After hiking rates ten straight rate times, the European Central Bank is expected to hold the refi rate steady at 4.50 percent and the deposit rate at 4.00 percent.

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.