ECB holds rates, signals steady hand as economy stumbles

The European Central Bank left interest rates unchanged as expected on Thursday, snapping an unprecedented streak of 10 consecutive rate hikes, and maintained its guidance which signals steady policy ahead, Report informs via Reuters.

The ECB has lifted rates by a combined 4.5 percentage points since July 2022 to combat runaway price growth but hinted last month that it would pause as record high borrowing costs are starting to work their way through the economy.

Price pressures are finally easing and inflation has more than halved in a year while the economy has slowed so much that a recession may already be under way, boosting market bets that rate hikes are finished and the ECB's next move will be a cut.

Looking to keep all of its options open, the ECB said it would follow a "data-dependent" approach and decisions would be based on incoming data.

"The key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to (the inflation) goal," the bank said in a statement after meeting in Athens for the first time in 15 years.

"Future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary," the ECB said.

The decision to keep rates unchanged is likely to reinforce expectations that the world's biggest central banks, including the US Federal Reserve, are essentially done tightening policy, ending an unprecedented series of synchronized rate hikes.

That is likely to shift market focus to just how long rates need to stay at their current highs, a tricky exercise as investors are already betting on the next ECB move to be a cut as soon as June, with two full moves priced in by next October, a timeline some policymakers consider unrealistic.

Another complication is that rising energy costs, given a boost by the new conflict in the Middle East, could keep inflation under pressure just as growth falters. That would herald a damaging period of stagflation, where inflation is high while growth stagnates.

The outlook for the economy appears to be increasingly precarious, putting a so-called "soft landing" in jeopardy.

With Thursday's decision, the ECB's deposit rate stays at a record high 4% while the main rate stands at 4.5%.