European Central Bank likely to keep interest rates on hold next week

The European Central Bank is set to meet next week for its policy decision. According to a Nordea Bank research report, the ECB is expected to keep its interest rates on hold during Lagarde’s second policy meeting. Focus would be on the strategic review. Risks are skewed towards a bit higher rates as an immediate market response.

“We expect the key ECB interest rates to be kept unchanged at next week’s meeting at -50bp and 0bp for the deposit rate and the main refinancing rate, respectively, which is in line with consensus and market pricing”, stated Nordea Bank.

Markets have greatly given up pricing further easing over the year ahead, and currently price in a clear risk of a rate hike next year, which seems premature. It will not take much softer figures for the markets to resume speculation about additional easing. The ECB’s forward guidance retains an explicit easing bias, which is not expected to be removed at this point.

A very gradual rebound, along with an even more gradual pick-up in core inflation might signify that it does not have to and thereby give the ECB the opportunity to devote 2020 to its strategic review.

“We expect no policy changes during the forecast horizon, implying a deposit rate at -50bp and asset purchases of 20bn per month, which we believe probably would not require raising the issuer limit or deviating from the capital key. Moreover, there are still five remaining TLTRO-III auctions planned and forward guidance will remain in place”, added Nordea Bank.