ECB, BoE leave rates on hold again

The euro has strengthened against the dollar after the ECB left interest rates unchanged and said nothing to encourage the idea that it was thinking of lowering them anytime soon, though softer than expected German and French PMI data this morning has seen it ease back a touch to around $1.096. Sterling has also firmed against the dollar, rising to $1.275, as the Bank of England warned about the risk of inflation persistence and the need to keep interest rates restrictive for an extended period of time. All of this, in turn, sees EUR/£ little changed this morning, trading at about 86p.

US bonds extended their Fed-inspired rally yesterday with 10-year yields falling by around 10bps, while German and UK yields the ended around 5bps lower. Meanwhile, in equity markets, both US and European stocks advanced further although the gains were modest.

The ECB left interest rates unchanged following yesterday’s meeting, as expected, and indicated they would remain on hold for a further period of time yet with Christine Lagarde saying there had been no discussion at all about cutting rates. It also announced that it would scale back bond re-investments under its pandemic purchase programme over the second half of 2024, ending them altogether at the end of next year as planned. The market still expects the ECB to lower rates over the first half of 2024, with almost 75bps of cuts priced in by June.

The Bank of England MPC also left interest rates on hold, although three of the nine members again voted for a 25bps hike. It noted that “key indicators of UK inflation persistence remain elevated”, particularly wage growth and services inflation, and reiterated that monetary policy will “need to be sufficiently restrictive for sufficiently long” to return inflation to target.

Economic data due today include flash PMIs for the Euro area, UK and US economies, as well as labour costs  in the Euro area and industrial production in the US.