ECB resists rate cut bets with pledge to stay tight

• The European Central Bank (ECB) affirmed its commitment to maintaining record-high interest rates despite lower inflation expectations. The central bank, focused on combating a severe inflationary period, emphasised that borrowing costs would stay unchanged.
• ECB President Christine Lagarde's stance contrasted with the more dovish tone of her U.S. Federal Reserve counterpart, Jerome Powell. Lagarde stressed that inflation would rebound soon, and the ECB had no discussions about rate cuts. This differed from Powell's signal of potential interest rate reductions.
• The ECB announced plans to phase out its last remaining bond-buying scheme, a measure introduced during the COVID-19 pandemic. This move is viewed as a smaller policy change, not indicating a shift to a more dovish stance like the U.S. Federal Reserve.
• The ECB's updated economic projections revealed lower growth and inflation expectations for the coming years. ECB staff expect headline inflation to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026, closing in on the bank's 2% target.
• Lagarde hinted at the possibility of data-rich months in the first half of the next year, implying that any rate cut might not occur before June or July. This came on the back of lower-than-expected inflation reading for November and comments from ECB board member Isabel Schnabel that were perceived as dovish.
• A sharp fall in bond yields since then has eased borrowing costs, undoing the ECB's tightening and potentially helping fuel inflation. Traders adjusted their expectations slightly, with rate cuts now anticipated in April, and the ECB's deposit rate remains at a record-high of 4%.

(Source: Reuters)