Lagarde explains decision to keep rates unchanged, comments on policy outlook

Christine Lagarde, President of the European Central Bank (ECB), explains the ECB's decision to leave the key interest rates unchanged in December and responds to questions from the press.

ECB press conference key quotes

"The labor market continues to support the economy."

"It's important to swiftly agree on a reform of the EU economic framework."

"Inflation is expected to decline more slowly in 2024."

"Most measures of longer-term inflation expectations currently stand at around 2%."

"Upside risks to inflation include geopolitical tensions."

"Inflation may surprise on the downside if the monetary policy depresses activity more than expected."

"Wage data we have now is not declining."

"We did not discuss rate cuts."

"Between hikes and cuts, there is a plateau of hold."

"Who wants to hang on for too long? Equally, we don't think it's time to lower out guard, there is still work to be done."

"This can take the form of holding rates."

This section below was published at 13:15 GMT to cover the European Central Bank's policy announcements and the market reaction.

The European Central Bank (ECB) announced on Thursday that it left key rates unchanged following the December policy meeting. With this decision, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will stay at 4.50%, 4.75% and 4.00%, respectively.

In its policy statement, the ECB reiterated that future decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary.

ECB Interest Rate Decision Live Coverage

ECB policy statement key takeaways

"According to latest Eurosystem staff projections for Euro area, inflation is expected to decline gradually over course of next year, before approaching ECB’s 2% target in 2025."

"Overall, staff expect headline inflation to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026."

"Compared with September staff projections, this amounts to a downward revision for 2023 and especially for 2024."

"Eurosystem staff expect inflation excluding energy and food to average 5.0% in 2023, 2.7% in 2024, 2.3% in 2025 and 2.1% in 2026."

"Past interest rate increases continue to be transmitted forcefully to economy."

"Eurosystem staff expect economic growth to remain subdued in near term."

"Eurosystem staff therefore see growth picking up from an average of 0.6% for 2023 to 0.8% for 2024, and to 1.5% for both 2025 and 2026."

"Based on its current assessment, ECB considers that interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal."

"In particular, interest rate decisions will be based on the assessment of inflation outlook in light of incoming economic and financial data, dynamics of underlying inflation and strength of monetary policy transmission."

"Interest rates are primary tool for setting monetary policy stance."

"Decided today to advance normalisation of Eurosystem’s balance sheet."

"ECB intends to continue to reinvest, in full, principal payments from maturing securities purchased under Pandemic Emergency Purchase Programme (PEPP) during first half of 2024."

"Over second half of year, ECB intends to reduce PEPP portfolio by €7.5 billion per month on average."

"ECB intends to discontinue reinvestments under PEPP at end of 2024."

"ECB will continue applying flexibility in reinvesting redemptions coming due in PEPP portfolio, with a view to countering risks to monetary policy transmission mechanism related to pandemic."

Market reaction to ECB policy decisions

EUR/USD continued to push higher with the immediate reaction to ECB policy announcements. At the time of press, the pair was up 0.5% on the day at 1.0930.

Euro price today

The table below shows the percentage change of Euro (EUR) against listed major currencies today. Euro was the strongest against the US Dollar.

	USD	EUR	GBP	CAD	AUD	JPY	NZD	CHF
USD		-0.38%	-0.61%	-0.47%	-0.42%	-0.59%	-0.05%	-0.15%
EUR	0.38%		-0.23%	-0.07%	-0.04%	-0.20%	0.34%	0.23%
GBP	0.61%	0.23%		0.13%	0.18%	0.00%	0.54%	0.46%
CAD	0.50%	0.08%	-0.14%		0.04%	-0.14%	0.40%	0.31%
AUD	0.44%	0.05%	-0.19%	-0.03%		-0.16%	0.35%	0.22%
JPY	0.60%	0.24%	0.02%	0.14%	0.19%		0.56%	0.45%
NZD	0.07%	-0.38%	-0.55%	-0.42%	-0.35%	-0.46%		-0.15%
CHF	0.19%	-0.23%	-0.45%	-0.30%	-0.27%	-0.44%	0.09%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

This section below was published at 08:05 GMT as a preview of the European Central Bank's (ECB) policy announcements.

The European Central Bank is set to keep key interest rates steady on Thursday for the second time in a row.
Eurozone economic outlook has worsened since the last meeting; however, ECB’s Lagarde could try to push back against rate cut expectations.
Euro is likely to react to updated macro forecasts and Lagarde’s presser.

At the October meeting, the European Central Bank (ECB) kept interest rates unchanged after an unprecedented 450 basis points increase in rates within less than two years. On Thursday, December 14 at 13:15 GMT, the central bank will announce its decision, followed by President Christine Lagarde's press conference at 13:45 GMT. The ECB will also publish updated staff macroeconomic projections. The ECB is widely expected to keep interest rates unchanged. Markets consider that the tightening cycle is over, and rate cuts are expected for the first half of the upcoming year.

European Central Bank interest rate decision: What to know in markets on Thursday

Federal Reserve officials forecast three interest-rate cuts next year.
EUR/USD jumped to 1.0900 following the FOMC meeting, as the US Dollar and Treasury yields tumbled.
The benchmark 10-year US Treasury bond yield tumbled to 4% on Fed’s policy pivot.
US S&P 500 rose sharply, breaking above 4,700 to the highest in almost two year; Dow Jones posts record close.
Industrial Production in the Eurozone contracted 0.7% in October, worse than the 0.3% decline expected. Compared to a year ago, production was 6.6% lower.
On Friday, the December HCOB's flash Eurozone Composite Purchasing Managers' Index (PMI) will be released with a modest improvement from 47.6 to 48 expected.
The ECB event could provide a fresh directional impetus to the EUR/USD pair, with attention set on expectations for what the central bank might do in the first quarter of 2024.

What is expected from the next ECB meeting and how will it impact EUR/USD?

Economists are widely expecting the European Central Bank to announce another hold on Thursday, keeping the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 4.50%, 4.75% and 4.00% respectively. After the policy pivot by the Federal Reserve at the December FOMC meeting, will the ECB definitively turn dovish?

Since the October meeting, inflation in the Eurozone has further softened. The Harmonized Index of Consumer Prices (HICP) experienced a 0.5% drop in November, and the annual rate stood at 2.4%, the lowest level since July 2021. The core inflation rate, which excludes volatile energy and food prices, slowed to 3.6%, the lowest since April 2022. Regarding economic activity, Gross Domestic Product practically stagnated during the third quarter, and reports from the current quarter indicate no significant improvement. The latest report before the meeting showed a decline in Industrial Production by 0.7% in October.

The combination of softer inflation and a weak economic outlook suggests that the ECB is unlikely to tighten monetary policy further at the last meeting of the year. Market expectations for rate cuts in the next year have increased, with a rate cut by the April 2024 meeting already priced in. “President Lagarde will most likely use her press conference to try to push back against the dovish narrative. However, we note that her October conference was quite downbeat, and the growth outlook has gotten worse since then,” explained analysts at BBH.

Discussions at the Governing Council are expected to focus on adjusting the Pandemic Emergency Purchase Programme (PEPP) and the Minimum Reserve Requirement, but analysts do not anticipate any decisions at this meeting. Another topic of debate is the reinvestment of proceeds of maturing securities.

The ECB is expected to maintain a cautious tone, refraining from declaring victory on inflation. Lagarde may reiterate the narrative of keeping interest rates “high for long” and emphasize that the market's pricing scenario is not the ECB's base case. Comments in a different direction could have significant market implications, with a dovish tone potentially triggering a sharp decline in the Euro.

The ECB will release staff macroeconomic projections for the Eurozone. Inflation and growth forecasts are expected to be revised downward. However, the revisions are likely to be moderate, as more significant revisions would require a change in Lagarde's narrative and could heighten market easing expectations.
“We look for a straightforward hold, with no other policy tweaks. Messaging should reflect recent ECB speeches, acknowledging constructive inflation dynamics and noting weak growth. Projections will be marked to market and are likely to show lower GDP and inflation forecasts,” summarized analysts at TD Securities, consistent with the views of most experts. If the ECB follows through as anticipated, the impact on the market could be relatively limited.

The EUR/USD pair peaked above 1.1000 in late November but experienced a subsequent bearish correction. It bottomed last week at 1.0724. After that, it moved sideways, until the FOMC meeting. The sharp decline of the US Dollar led to an upward movement in the pair, pushing it to 1.0900 and shifting the short-term bias to a bullish outlook. The next strong resistance stands at 1.0970, before the 1.1000 mark. The weak US Dollar serves as crucial support for the upside in EUR/USD ahead of the ECB decision.

On the flip side, the area around 1.0825 is a relevant technical support. The key level to watch is at 1.0730, represented by an upward trendline. If this level is breached and the price moves below it, it could potentially signal further losses and open the way for a downward trend to develop.

If the ECB keeps rates unchanged and Lagarde delivers no surprises, the impact on the market could be limited, and the focus will shift to the next meeting on January 15, 2024. In the unexpected scenario where the ECB strikes with a firm hawkish tone, potentially accompanied by an announcement of a reduction in the PEPP reinvestments, the Euro could rally, approaching 1.1000. However, it may not necessarily be sustainable, as it could swiftly fade as market attention turns back to the economic outlook.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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