ECB keeps interest rates unchanged; investors await Lagarde Q&A – business live

Lagarde also said the ECB is keeping a close eye on developments in the Red Sea, where attacks on ships by Yemen’s Houthi rebels have led to ships being rerouted, and concerns about shipping delays and higher costs, which could push inflation up.

We are observing very carefully because we are seeing that shipping costs are increasing, delivery delays are increasing. And while we all know that there is more shipping capacity than there was in in 2020 and 2021, we also know that costs and fees are increasing.

The Q&A has started. The first question is whether the governing council discussed a rate cut at today’s meeting.

Lagarde said:

The consensus around the table of the Governing Council was that it was premature to discuss rate cuts.

One other thing, which was very much a consensus around the table was that we had to continue to be data dependent.

Lagarde summed up the risks to inflation:

Upside risks to inflation include the heightened geopolitical tensions, especially in the Middle East, which could push energy prices and freight costs higher in the near term, and hamper global trade.

Inflation could also turn out higher than anticipated if wage wages increase by more than expected or profit margins prove more resilient by contrast, inflation may surprise on the downside if monetary policy dampens demand by more than expected or if the economic environment in the rest of the world worsens unexpectedly.

Moreover, inflation could decline more quickly in the near term if energy prices evolve in line with the recent downward shift in market expectations of the future path for oil and gas prices.

Turning to inflation, ECB president Christine Lagarde said:

Inflation is expected to ease further over the course of this year as the effects of past energy shocks, supply bottlenecks and the post pandemic reopening of the economy fade and tighter monetary policy continues to weigh on demand.

Almost all measures of underlying inflation declined further in December.

The elevated rate of wage increases and falling labour productivity are keeping domestic price pressures high, although these two have started to ease.

And the growth outlook:

Looking now at the risk assessment, the risks to economic growth remain tilted to the downside.

Growth could be lower if the effects of monetary policy turn out stronger than expected.

A weaker world economy or a further slowdown in global trade would also weigh on euro area growth.

Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East are key sources of geopolitical risks.

This may result in firms and households becoming less confident about the future and global trade being disrupted.

Growth could be higher if rising real incomes mean spending increases by more than anticipated or if the world economy grows more strongly than expected.

The pace of US economic growth slowed in the last three months of 2023, but far less than had been expected, underlining the continued resilience of the economy.

The commerce department reported on Thursday that US gross domestic product (GDP) – a broad measure of economic health – grew at an annualized rate of 3.3% in the final quarter of the year, down from 4.9% in the previous quarter but in line with pre-pandemic growth, and well ahead of the 2% economists had expected.

Robust consumer spending and government outlays contributed to the growth.

The Federal Reserve has been attempting to cool economic activity in order to bring down inflation. Since March 2022 the Fed has increased rates to a 22-year high and held them there. Inflation has fallen from a high of 9% in June 2022 to 3.4%.

The rate rises have increased the cost of borrowing and many – including the Fed – had expected a subsequent slowdown in economic activity to lead to layoffs. But so far the Fed appears to be on course for what it has termed a “soft landing”.

Hiring has remained robust – unemployment hovers at close to a 50-year low – and while growth has slowed, consumers have continued to spend, the US economy has weathered the rate rises and stock markets have hit record highs.

“The Fed – so far – has managed to strangle inflation without strangling the economy,” said Dan North, senior economist with Allianz Trade Americas. North said the Fed rate rises were still working their way through the economy and he expected 2024 to be a year of slow growth “but we are not using the recession word yet.”

European Central Bank president Christine Lagarde has kicked off the press conference with a statement on the economy.

Looking at the economic activity, the euro area economy is likely to have stagnated in the final quarter of ‘23.

The incoming data continue to signal weakness in the near term. However, some forward looking server indicators point to a pickup in growth further ahead.

The labour market has remained robust. The unemployment rate at 6.4% in November has fallen back to its lowest level since the start of the euro and more workers have entered the labour force.

The US economy expanded more than expected in the fourth quarter, powered by consumer spending.

GDP rose at a 3.3% annualised rate, according to the government’s preliminary estimate. This compares with market forecasts of 2.2% growth. In 2023, the economy expanded by 2.5%, its strongest performance since 2021.

ECB president Christine Lagarde will hold a press conference at 1.45pm GMT. You can watch it here.

The European Central Bank’s governing council has kept interest rates unchanged, as expected.

The ECB’s rate on its main refinancing operations, which provide the bulk of liquidity to the banking system, is at 4.5%. Its deposit rate, which is paid on commercial bank deposits, is at 4%. The marginal lending facility, which offers overnight credit to banks, is at 4.75%.

The central bank explained:

The incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook. Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued, and the past interest rate increases keep being transmitted forcefully into financing conditions.

Tight financing conditions are dampening demand, and this is helping to push down inflation.

Ahead of the European Central Bank’s interest rate decision at 1.15pm GMT, Germany’s 10-year bond yield rose to its highest level since early December.

Germany’s 10-year yield, the benchmark for the euro zone, touched a high of 2.371% earlier. Yields move inversely to prices.

The central bank is widely expected to leave interest rates unchanged but investors will be looking for any hints on when borrowing costs will start to come down.

The ECB’s deposit rate, which is paid on commercial bank deposits, was last raised in September to 4% – the highest since the euro was launched in 1999. The rate on its main refinancing operations, which provide the bulk of liquidity to the banking system, is at 4.5%. The marginal lending facility, which offers overnight credit to banks, is at 4.75%.

Jeroen Blokland, founder of Blokland Smart Multi-Asset Fund, tweeted:

On the markets, shares are drifting lower while oil prices have risen and the pound is little changed.

The FTSE 100 index is trading 14 points, or 0.2%, lower at 7,513. Germany’s Dax has lost 0.4%, while France’s CAC is down 0.45% and Italy’s FTSE MiB has slid nearly 1% ahead of the European Central Bank’s interest rate decision.

In the oil market, Brent crude, the global benchmark, is $1.07 higher at $81.10 a barrel, a 1.3% gain. US light crude has gained $1.11 to $76.2 a barrel, up 1.5%.

Oil prices rallied after data showed US crude stockpiles fell more than expected last week, and the Chinese central bank’s cut in banks’ reserve requirements (the amount of cash banks must hold in reserve) raised hopes of more economic stimulus to kickstart the economy.