The European Central Bank (ECB) is anticipated to keep its key interest rates unchanged this Thursday, following a series of ten consecutive rate hikes that led to a 450 basis point increase over the past two years. This decision will be revealed at a press conference by ECB President Christine Lagarde. This comes as the pair hits its lowest due to escalating tensions in the Middle East and rising US Treasury bond yields.
Economists project that the ECB will maintain the Deposit Rate at 4% and the Refinancing operations lending rate at 4.5%. Despite this, markets are expecting a hawkish message from Lagarde, which could fuel hopes for an interest rate hike in December. The ongoing Hamas-Israel conflict is seen as an upward risk to the Eurozone’s inflation outlook, potentially affecting the ECB’s 2.0% target by the end of 2025.
This week, ECB policymakers may consider non-interest rate monetary policy tools such as minimum reserves and reversed tiering. These measures are aimed at addressing the multi-trillion-euro pool of excess liquidity in banks, with an increase in reserve requirements being considered as a first step. Nevertheless, they might hold back from further tightening financial conditions while evaluating the impact of their interest rate hikes on economic and inflation prospects.
Recent economic indicators have presented a mixed picture. Germany’s IFO Business Climate Index reported a higher-than-expected figure at 86.9, while HCOB’s flash Eurozone Composite PMI fell to a low of 46.5 in October. The Eurozone’s annual inflation dropped to 4.3% in September, suggesting a potential recession. These data points, coupled with significant losses in and the closing gap of the 10-year US Treasury bond yield on the 5.0% level, support the case for an ECB pause this Thursday.
BBH analysts forecast that the ECB will likely keep rates steady and discuss modifications to reserve requirements and reducing its PEPP holdings. WIRP suggests no odds of a hike this week, rising to a peak at only 10% for December 14. If the ECB holds rates and Lagarde delivers a hawkish message, the EUR/USD pair could rebound toward 1.0800. On the other hand, if the ECB pauses and downplays potential upward risks to inflation expectations, the EUR/USD pair could continue its downtrend toward 1.0500.
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