In brief

• At its monetary policy meeting on 14 December 2023, the European Central Bank (ECB) kept all key interest rates on hold, for a second consecutive meeting.


• The ECB announced that reinvestments of the Pandemic Emergency Purchase Programme (PEPP) will decrease by 50% from July 2024.


• President Lagarde stated that the Governing Council (GC), will not let its guard down in the fight against inflation.

Key policy rates remain unchanged

At the conclusion of its final monetary policy meeting of 2023, the ECB kept all three key interest rates unchanged, maintaining the refinancing rate at 4.50%, the marginal lending facility at 4.75% and the deposit facility rate at 4.00%. This meeting was the second consecutive pause, as the ECB moves through a series of meetings where rates will remain unchanged.  

EXHIBIT 1: THE ECB DEPOSIT RATE REMAINS AT AN ALL-TIME HIGH OF 4.00%

Source: J.P. Morgan Asset Management and Bloomberg; data as of 14 December 2023.

Once again, the decision to pause was widely expected, with eurozone inflation having “dropped markedly” over recent months as the effects of monetary tightening continue to forcefully feed through to the economy, dampening demand and reducing price pressures. Updated inflation forecasts predict a steeper reduction of inflation back to the ECB’s 2% target, compared to the ECB’s previous estimations from September. The latest average annual inflation estimates are as follows (with September’s forecasts in brackets): 5.4% in 2023 (5.6%); 2.7% in 2024 (3.2%); 2.1% in 2025 (unchanged); and 1.9% in 2026.

Eurozone growth is set to improve over the current forecast horizon, as rising wages, together with falling inflation, lead to an increase in household real wages. Average growth of 0.6% in 2023 will increase to 0.8% in 2024 and to 1.5% in both 2025 and 2026.

During the press conference, President Lagarde was asked whether the GC had discussed future rate cuts. Her response was that the GC believes that there is “still some work to be done” to ensure inflation is brought back to the target level, firmly stating that the GC “did not discuss rate cuts at all” and that it would not be moving from rate hikes towards immediate rate cuts. 

On the contrary, the GC is now in the transition period between cycles, believing that the eurozone will avoid a recession, thereby alleviating the need to reduce rates in the near term. Any rate cuts priced into the market during the first half of 2024 therefore appear to be premature.    

Balance sheet normalisation

After much market speculation, the ECB has amended its forward guidance on PEPP reinvestments.  Previously, all guidance suggested reinvestments would continue until the end of 2024. Although December 2024 will still see the end of all reinvestments, the ECB will now taper down these purchases by EUR 7.5 billion per month, commencing in July 2024. President Lagarde commented that she saw this amendment as balance sheet reduction, as opposed to monetary loosening, reaffirming that the key policy rates remain the primary monetary policy tool.

EXHIBIT 2: PEPP HOLDINGS WILL BE REINVESTED UNTIL JULY 2024, FOLLOWED BY A CONTROLLED TAPER OF MATURITIES.

Source: J.P. Morgan Asset Management and ECB, as of 30 November 2023.

Implications for euro cash investors

With no increase to the ECB’s deposit rate, euro cash investors won’t witness an immediate increase in yields from a liquidity fund’s overnight investments. However, the ECB’s reluctance to discuss rate cuts at this moment in time can give greater comfort to short-dated cash investors that yields will likely remain at their current levels as we progress through the first half of 2024. 

Maturing securities in J.P. Morgan Asset Management’s euro liquidity strategies will continue to benefit from higher reinvestment rates, derived from previous increases in the ECB deposit rate. By moderately increasing the funds’ weighted average maturity during this transition period, from a hiking cycle towards potential rate reductions, our portfolios are well placed to lock in investments while yields remain higher.

With the peak in rates likely now upon us, we believe investors can be more comfortable adding some duration risk while maintaining an active approach to cash management, prioritising diversification and liquidity.

09vb231512132353

NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only, as defined by local laws and regulations. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://am.jpmorgan.com/global/privacy. This communication is issued by the following entities: In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be; in Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited ABN 55143832080) (AFSL 376919). For U.S. only: If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance. Copyright 2023 JPMorgan Chase & Co. All rights reserved.