The ECB lived up to widely held expectations and today announced no change in official interest rates. For the second meeting in a row, the central bank left the key deposit rate at its 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. Crucially too, the central bank essentially retained the previous meeting's 'soft' forward guidance. Hence, in terms of achieving the 2 percent inflation target,"…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 this goal."

However, while interest rates were unchanged, the QT programme has been expanded to include the €1.7 trillion pandemic emergency purchase programme (PEPP). The bank has previously committed to the full reinvestment of maturing assets in the PEPP until at least the end of next year but this will now be curtailed at the end of June. During the second half of 2024, the PEPP will be reduced by €7.5 billion per month on average and reinvestments will terminate altogether at the end of the year. This should be well received by the bank's hawks who have wanted the PEPP to be part of QT for some time.

Importantly, the new economic forecasts show a tidy downward revision to inflation. The headline rate is now expected to average 2.7 percent in 2024 (versus 3.2 percent in September's forecast) followed by 2.1 percent in 2025 (2.1 percent) and 1.9 percent in 2026. In the same years, the core rate that excludes food and energy is put at 2.7 percent (2.9 percent), 2.3 percent (2.2 percent) and 2.1 percent. In other words, although the overall rate is shown to be slipping just below target three years ahead, the underlying rate remains slightly above. Indeed, the bank pointed out that domestic price pressures remain elevated, primarily due to strong growth in unit labour costs.

In sum, today's statement effectively confirms that, in the absence of a surprise turnaround in inflation, key interest rates have peaked. However, the bank will likely need more convincing that underlying prices are cooling fast enough before pulling the trigger on interest rate cuts. Financial markets have been pricing in a first 25 basis point ease around March next year but for at least some policymakers, that is likely to be too soon.

After stepping aside at their October meeting that followed 11 straight rate hikes, the European Central Bank is expected to once again hold policy unchanged.

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.