Having cut key interest rates at its last meeting in June, the ECB again matched market expectations by leaving policy on hold today. Accordingly, the refi rate remains at 4.25 percent, the (still key) deposit rate at 3.75 percent and the rate on the marginal lending facility at 4.50 percent.

The previous forward guidance was also unamended and so still says that the bank will"keep policy rates sufficiently restrictive for as long as necessary…" to achieve the inflation target. In other words, the ECB refuses to commit to further easing in the absence of fresh data that, from an inflation point of view, suggest that it is safe to do so. Indeed, the bank remains data-dependent, effectively meaning that policy continues to be tied to developments in the HICP in general and in the core HICP measures in particular.

Still, non-standard policy measures are now tightening policy more aggressively than earlier as, in line with pre-announced plans, the €1.7 trillion pandemic emergency purchase programme (PEPP) has been brought into the QT fold. The move will bolster the net asset sales already underway from longstanding asset purchase programme (APP) by a targeted €7.5 billion a month through December.

In summary, there were no major surprises in either today's official statement or press conference. Policy remains geared towards lower interest rates but only if inflation developments permit. Following the mixed June report which underlined the stickiness of prices in some key areas, most Governing Council members will want reassurance that inflation is still thought to be on track to sustainably meet its target. To this end, the next meeting on 12 September, when the bank is due to issue updated economic forecasts, could see the next cut but only so long as the projections show policy is working.

Speculation about a possible back-to-back cut in key ECB interest rates has faded since the June ease and no change in policy is now widely expected.

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.