As widely anticipated, the ECB today announced no change to policy. The key deposit rate remains at its record high of 4.0 percent, the refi rate stays at 4.50 percent and the rate on the marginal lending facility at 4.75. percent. Most, but not all, members wanted to keep rates stable as a few wanted an immediate cut. Predictably too, there were no adjustments made to the QT programme, currently limited to the longstanding asset purchase programme (APP) but due to include the pandemic emergency purchase programme (PEPP) from July. The PEPP will have an average monthly reduction target of €7.5 billion through December when reinvestments will be discontinued.

The 'soft' forward guidance was also unaltered, stating that the"Governing Council (GC) considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution" to meeting the inflation goal. However, the statement also noted that should the GC have increased confidence that inflation is converging towards target in a sustainable manner, it would be appropriate to reduce rates. This re-affirms the importance of the bank's June economic forecasts.

In fact, the overall tone of the statement was mildly dovish, indicating that the latest data had been in line with the GC's previous assessment of the medium-term inflation outlook. Importantly, most measures of underlying inflation as well as wage growth were seen to be easing and firms were absorbing part of the rise in labour costs in their profits. That said, the bank still believes that domestic price pressures are strong, particularly in services.

Today's statement and press confidence will not upset an increasingly strong market conviction that key rates will be lowered by 25 basis points at the next meeting in June. Indeed, already the focus is beginning to shift to whether or not an ease then might be followed by another as soon as July. With the Fed seemingly now on hold for longer than previously expected, the growing likelihood of widening interest rate differentials in favour of the dollar could become a problem for the euro and, potentially, a new hurdle in the path of meeting the ECB's inflation target.

The April meeting is widely expected to leave policy on hold but lay the groundwork for a 25 basis point cut in key interest rates in June.

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 20 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.