Just now, the European Central Bank (ECB) has concluded its longest consecutive interest rate hike in its 25-year history as scheduled, reaffirming its determination to combat inflation, causing the euro to dip slightly. Regarding the first line of defense against market turmoil, the central bank stated...

At 20:15 Beijing time on Thursday, the ECB maintained its three main interest rates unchanged, in line with market expectations, marking the first pause in rate hikes since July 2022, after a cumulative increase of 450 basis points.

Following the announcement of the interest rate decision, the euro fell slightly against the US dollar, dropping more than ten points in the short term, currently trading at 1.0534.

The ECB stated that the previous rate hikes are still effectively transmitted into financing conditions. If the rates are maintained at the current level for a sufficient period, they will make a significant contribution to inflation returning to the target in a timely manner. Future decisions will ensure that policy rates remain at a sufficiently restrictive level for the necessary duration.

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Regarding the Pandemic Emergency Purchase Programme (PEPP), the ECB stated that the reinvestment plan under PEPP will continue at least until the end of 2024. The asset purchase programme portfolio is decreasing at a predictable and measured pace; the ECB will continue to implement the PEPP reinvestments flexibly to address risks related to the monetary policy transmission mechanism associated with the pandemic. The ECB views PEPP as the first line of defense against market turmoil, despite some policymakers strongly advocating for an early end to its last remaining bond purchase programme.

The ECB reiterated its determination to ensure that inflation returns to the 2% medium-term target in a timely manner. Inflation will remain high for an extended period. However, inflation significantly decreased in September, and most core inflation indicators continue to slow down, including a strong base effect. But price pressures in the euro area remain strong.

According to the latest statistical data released by Eurostat, the inflation rate in the euro area has decreased in recent months but is still higher than the ECB's 2% target, at 4.3% as of September. Although the decline in energy costs has partly driven the fall in inflation, if winter temperatures drop significantly, Europe will face higher natural gas demand, and the progress on inflation is not guaranteed to continue. Following the outbreak of the Russia-Ukraine conflict, downstream sectors in non-energy industrial goods, including chemicals, have not been able to keep up with the rising raw material costs. Despite some price reductions, demand remains weak, and producers struggle to pass on cost increases to customers.

Regarding the future path of interest rates, the ECB stated that it will continue to adopt a data-driven approach. Interest rate decisions will be based on assessments of the inflation outlook. In addition, the central bank also said that the Transmission Protection Instrument (TPI) can be used to address unfounded market volatility.

As the ECB adheres to its September statement, guidance has seen little change, and the two-year German government bond yield has edged lower. The spread between Italian and German 10-year government bond yields has fallen below 200 basis points.

Is it too early to discuss rate cuts? Institutions: The rate hike cycle has ended.At the subsequent press conference, European Central Bank (ECB) President Christine Lagarde stated that the economy remains weak, with the manufacturing sector continuing to decline and the service industry showing signs of softness. Lackluster demand and tightened financing are suppressing consumption, and the economy is expected to remain weak for the rest of the year, with the possibility of continued softness in the coming months. However, the economy should strengthen in the coming years due to increased real income.

Lagarde mentioned that the impact of high interest rates is expanding, with signs of weakness appearing in the labor market, and inflation is expected to decrease further in the short term. Most core inflation indicators continue to decline. Domestic price pressures remain strong, and most long-term inflation expectation indicators are currently around 2%.

She also stated that governments should eliminate energy support measures and gradually reduce debt. Structural reforms can help alleviate inflationary pressures, and EU fiscal reforms should be completed by the end of the year.

Lagarde noted that energy prices are becoming increasingly unpredictable under geopolitical factors. Some inflation expectation indicators are rising and need to be closely monitored. The Israel-Palestine conflict is a major source of risk that could undermine confidence and spending.

Although Lagarde indicated that it is not the time for forward guidance and that discussing rate cuts is premature, the ECB must remain stable and stand firm. Pausing interest rate hikes does not mean that they will never raise rates again, but the consensus among institutions is that the central bank's rate hike cycle has ended.

Neil Birrell, Chief Investment Officer at Primemountain Investments, said in a report that the ECB, like the Federal Reserve and the Bank of England, believes that the interest rate increases so far have been sufficient to bring inflation back to the target level. He stated that the ECB clearly believes that keeping interest rates at this level for a sufficient amount of time will achieve the goal of reducing inflation to 2%. At the same time, the ECB is also prepared to take further action, but this is a choice they have no other option but to make. He said, "It is too early to consider rate cuts now, but the topic has gradually been put on the agenda."

Richard Galan, Chief Investment Strategist at Omnis Investments, stated that the ECB has officially joined the camp of pausing interest rate hikes and adopting a wait-and-see mode. This makes sense because inflation is significantly decreasing, and they hinted last month that the direction of interest rates would be horizontal. "Higher for longer" will also be a slogan that the ECB is keen to repeat for a period to ensure that their work so far is not undermined by market expectations of premature rate cuts.

Jack-Allen Reynolds, an analyst at Capital Economics, wrote in a report that the ECB's decision not to raise interest rates further was entirely expected. The ECB maintained key interest rates unchanged, despite inflation remaining high, as the Eurozone economy begins to falter. The ECB's decision to keep rates unchanged was widely anticipated by the market and has already been fully reflected in prices. At the same time, the central bank's statement that high interest rates should continue to have the expected effect indicates that policymakers believe interest rates have peaked and will remain at the current level for some time.

Gurpreet Gill, Global Fixed Income Macro Strategist at Goldman Sachs Asset Management, said in a report that Goldman Sachs' base case is that the ECB will start cutting interest rates from the third quarter of 2024. She said, "If there is a sharp economic slowdown, or if the labor market deteriorates more than expected, it could prompt the ECB to shift to easier policy sooner." As expected, the ECB maintained interest rates unchanged on Thursday, and Goldman Sachs believes that the ECB's long-term rate hike cycle has now ended.

Dean Na, Chief Economist for the Eurozone and the UK at UBS Global Wealth Management, said that the ECB's decision to keep interest rates unchanged has received ample attention, so it is not surprising for investors. Although the information in the press conference remained largely unchanged, continuing to emphasize data dependency and the necessity of ensuring inflation returns to the target, it seems very clear that the rate hike cycle has ended.Julian Laffargue, Chief Market Strategist at Barclays Private Bank in London, stated that, as expected, the European Central Bank (ECB) decided to keep interest rates unchanged while reiterating the statement about maintaining higher rates for a longer period. The ECB did not provide further information on how to handle the gradual end of the Pandemic Emergency Purchase Programme (PEPP). Entering the press conference, there were two key questions: how does the ECB intend to deal with its balance sheet, and what about the various programs it is still running? When will the ECB acknowledge that inflation has dropped to a level low enough to ease its monetary policy stance? As shown by the October PMI data, with the macroeconomic situation deteriorating rapidly, Barclays believes that the ECB will have to act with great caution going into 2024, with no choice but to lower interest rates.