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The European Central Bank has left interest rates unchanged and given few indications of when it might start to cut borrowing costs despite saying it expects to hit its inflation target by 2025.
The ECB’s decision on Thursday came as investors ramped up their bets that major central banks are getting closer to lowering borrowing costs, following signals from US Federal Reserve officials that they expect to cut rates more aggressively than previously planned next year.
After the ECB maintained its benchmark deposit rate at its highest-ever level of 4 per cent for the second consecutive meeting, policymakers repeated their determination to keep borrowing costs at “sufficiently restrictive levels for as long as necessary”.
Eurozone rate-setters acknowledged that inflation had “eased further” in recent months but said it was likely to pick up in the near term. They forecast that consumer price growth would slow to their 2 per cent target within the next two years — clearing a key hurdle for them to consider cutting rates.
Inflation in the 20-country single currency bloc slowed to an annual rate of 2.4 per cent in November, its lowest level for more than two years, fuelling market bets that the ECB will begin cutting borrowing costs as early as next March.
Economists have been cutting their forecasts for eurozone growth next year after a string of weak recent data on industrial production and retail spending as well as signs that governments will reduce spending — all of which is likely to cool price pressures.
Investors will be closely watching the press conference by ECB president Christine Lagarde later on Thursday for any hints on the timing of potential rate cuts.
“The more important question is how much easing the ECB will deliver in this cycle,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “If the Fed does cut earlier and faster, it’s going to be very difficult for the ECB to hold on to their position.”
After bond markets rallied in response to the Fed’s announcement late on Wednesday, traders in swaps markets were pricing in at least six quarter-point rate cuts for both the Fed and the ECB next year and five such moves by the Bank of England.
The BoE earlier kept its bank rate unchanged at 5.25 per cent, warning that “key indicators of UK inflation remain elevated”, leaving the option open to raise rates further and saying its policy “is likely to need to be restrictive for an extended period of time”.
This followed a signal from the Swiss central bank that it was nearing a potential rate cut by dropping its insistence that a further tightening of policy “may become necessary”.
However, Norway’s central bank bucked the dovish trend earlier in the day by announcing an unexpected quarter-percentage point rate rise in an effort to tackle persistent inflation.
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