ECB: deposit rate therefore remains at 4%

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Peter Goves (MFS Investment) | As widely expected, the ECB kept all three of its policy rates on hold at the January meeting. The deposit rate therefore remains at 4% and it has been held at this rate since September 2023. We would agree that the longer rates are held at such restrictive levels, domestic demand will remain subdued and (core) inflation will continue to fall. Today’s meeting affirms our thesis that cuts are coming, possibly later in Q2 (although Lagarde rightly wouldn’t be drawn on the precise timing of this). We therefore remain constructive on core euro area duration with a curve steepening bias.

The press statement was shorter than previous and more or less entirely as expected. There was nothing significant really to note. At the margin, the idea that dampened demand will continue to weigh on inflation was a slight dovish addition. Lagarde’s tone at the press conference also appeared to support the idea that it’s a matter of when, not if, rate cuts come in 2024. As such, there is little from January’s ECB meeting to change the view that policy rate cuts are on the horizon. This is predicated on our central scenario of an ongoing subdued economic outlook and inflation falling to target.

The EGB spreads remain resilient, with 10yr BTP-Bunds at relatively tight levels. QT policy has been communicated transparently with predictable implementation. Supply continues to be absorbed well too. Today’s ECB meeting does not alter the view that we struggle to see negative catalysts that would provoke significant widening in the near term.

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