European Central Bank (ECB) interest rate decision preview

The euro and European indices like DAX, CAC 40, and FTSE MIB are on edge this week as traders wait for the upcoming ECB and Federal Reserve decisions. The EUR/USD pair retreated for two straight days and was hovering near its lowest point since December 13th.

Similarly, the EUR/GBP exchange rate tumbled to 0.8550. The euro has also slipped against other currencies like the Swiss franc and Norwegian krone. Meanwhile, European stock indices were little changed even as their American counterparts like the Nasdaq 100 and S&P 500 surged to a record high. 

The ECB will start its first monetary policy meeting of the year on Wednesday and deliver its verdict on Thursday. This meeting comes at a time when the European economy is not doing well, with countries like Germany and France reporting slow growth. The bloc is also on the verge of sinking to a recession as access to financing remain tough.

Europe’s inflation is also ticking upward and the crisis in the Middle East could make it worse. Data by the Eurostat showed that the euro area inflation rose to 2.9% in December from 2.4% in the previous month. The European Union’s inflation jumped to 3.4%, much higher than the median target of 2.0%.

Therefore, analysts expect that the ECB will maintain interest rates at a record high of 4.50%. It will also leave the deposit facility rate at 4%. In an e-mail statement, Gary Thomson, the Chief Operating Officer at FXOpen UK said:

“There are no doubts that the ECB will keep the interest rate on hold at its upcoming meeting on the 25th of January. Nevertheless, the rhetoric coming from the ECB, becoming more accommodative, adds an element of intrigue to the upcoming press conference.”

The question is whether the ECB will point to rate cuts or maintain a hawkish tone as it has done in the past. In a statement at the World Economic Forum, Christine Lagarde said that the bank needed more time to bring inflation down. She estimated that the first interest rate will come in by summer.

The ECB wants to avoid declaring victory to avoid the pandemic mistake when it delayed hiking interest rates. At the time, like the Fed, the ECB maintained that inflation was transitory. As a result, it was among the last major banks to start hiking rates.