As widely anticipated, the ECB made no policy changes at its first meeting of 2024. Accordingly, the key deposit rate remains at a record 4.0 percent, below both the refi rate (4.50 percent) and the rate on the marginal lending facility (4.75 percent).

Forward guidance similarly matched the December statement whereby"…the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution…" to achieving the 2 percent medium-term inflation target. Policy stays data-dependent.

There is nothing new here and the same applies to the QT programme. As indicated at the end of last year, the asset purchase programme (APP) continues to shrink as the Eurosystem no longer reinvests the principal payments from its maturing securities. For now, inflows from maturing securities acquired under the pandemic emergency purchase programme (PEPP) will continue to be fully reinvested, but a switch to partial reinvestment will aim to reduce the portfolio by an average €7.5 billion a month over the second half of the year.

ECB President Lagarde's press conference also offered little in the way of fresh insight. By and large, recent economic data seem to have contained few surprises and perceived risks to the real economy remain on the downside. For inflation, domestic price pressures were seen as high, but moderating, while military action in the Middle East was an upside external threat. Lagarde pointed out that the consensus at the Governing Council table thought it premature to talk about rate cuts.

Nonetheless, today's policy statement and press conference should leave investors still expecting the first cut in ECB interest rates next quarter. Timing-wise, the Governing Council will want to have at least some idea of how the 2024 wage negotiations are going as well as further evidence of declining underlying inflation. This suggests that the next couple of meetings in March and April will be too soon, although the release of updated economic forecasts at the former could well have an important impact on market expectations.

The European Central Bank is expected to hold rates steady despite improvement in inflation and weakness in economic activity. The question for policy watchers is when the bank expects to bring down rates.

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.