PGIM Fixed Income: Commentary on ECB interest rate decision

PGIM Fixed Income: Commentary on ECB interest rate decision

October 27, 2023

Interest Rates ECB
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As expected, the ECB held rates at 4% at its meeting today. However, more of a dovish surprise was that they did not discuss bringing forward an end to PEPP reinvestment, says Katharine Neiss, Chief European Economist at PGIM Fixed Income.

Although Christine Lagarde continued to emphasise the uncomfortably high inflation backdrop, there was greater acknowledgement that the euro area economy is weakening – and possibly rapidly so.

Moreover, there is more to come from tighter credit conditions feeding through to the real economy. In light of this, it makes sense for the central bank to sit tight for now, and wait and see how the economy evolves over the coming months.

That said, Lagarde also emphasised that it was premature to discuss interest rate cuts at this stage. The bank will likely want to see core inflation continue to fall back in Q4, and for wage growth to ease in Q1 before making any such consideration.

All of this is conditional on no new shocks, so it was interesting to hear Lagarde talk about geopolitical risks potentially affecting energy prices as well as climate events affecting food prices – these risks are asymmetric and would put further upward pressure on inflation.

The bottom line from all of this is that we are looking at rates remaining high for the foreseeable future. The key indicators to watch in coming months are whether inflation does indeed continue to fall back and any signs that the weakness in the euro area economy is bottoming out.

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