The European Central Bank’s (ECB) Governing Council on Thursday held its key policy rates unchanged following the conclusion of a two-day meeting. The decision aligned with the consensus estimates.
The EUR/USD pared some of its gains following the rate decision, and traded at sub 1.17 level, although up about 0.19%.
Earlier in the day the Bank of England (BoE) also announced a pause decision, despite inflation overshooting target by one percentage point.
ECB Decides to Err on Side of Caution
The ECB left its main refinancing rate unchanged at 2.15%, the deposit facility rate at 2% and the marginal lending facility at 2.40%.
“While the incoming information has been broadly consistent with the Governing Council’s previous assessment of the inflation outlook, the upside risks to inflation and the downside risks to growth have intensified,” the central bank said in a statement.
The central bank clarified that “the implications of the war for medium-term inflation and economic activity will depend on the intensity and duration of the energy price shock and the scale of its indirect and second-round effects.”
Some strategists such as ING Chief Economist for Belgium, Luxembourg and Eurozone Peter Vanden Houte anticipated that the central bank may be forced to announce an “insurance” rate hike to prevent a deterioration in inflation expectations. “The stagflationary shock induced by the war in the Middle East will slow eurozone growth in the coming months, while inflation will climb towards 4%,” Vanden Houte said.
Flash estimates released by the Eurostate Thursday showed a slowdown in euro area GDP to 0.1% quarter over quarter (QoQ) and a pick up in annual inflation to 3% in April from 2.6% in March.
Central Banks Hold Fire
The Bank of Japan set the tempo for March policy decisions of G7 central banks this week as the central bank, led by Governor Kazuo Ueda kept the uncollateralized overnight policy rate on hold at 0.75%, although 3 dissenters preferred a quarter-point hike to 1%.
On the other hand, the Bank of Canada chose a dovish pause, signaling that only slight monetary policy adjustment may be required if its baseline forecasts materialize. The Federal Reserve Chair, led by Chair Jerome Powell, on Wednesday also maintained the Fed funds rate at 3.50%-3.75%, although it introduced a statement showing a dovish tilt. However, the decision was rendered hawkish as four dissented, one calling for a quarter-point cut and the other three voicing opinions against introducing the dovish-leaning statement.
The BoE kept its key policy rate unchanged at 3.75% with the decision adopted by an 8-1 margin. The central bank’s Chief Economist Huw Pill voted to raise rates to 4%. While noting that CPI inflation quickened to 3.3% and will likely to rise further due to the effects of higher energy pass through effect, it flagged the risk of material second-round effects in price and wage-setting.
The rise of annual inflation about one full percentage point above BoE’s 2% target necessitated an inflation letter to the Chancellor of Exchequer, Rachel Reeves, outlining how the central bank would bring pricing pressure back below the target.
