In brief

• At its first monetary policy meeting of the year on 25 January 2024, the European Central Bank (ECB) kept all key interest rates on hold.
• The Governing Council believes it is premature to discuss the prospect of rate cuts and says decisions will be taken one meeting at a time.
• President Lagarde stated that the ECB would maintain sufficiently restrictive interest rates for as long as necessary to ensure inflation returns to target.

Key policy rates remain unchanged

At the conclusion of its first monetary policy meeting of 2024, 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 was the third consecutive meeting to conclude with no change to monetary policy, with the last rate hike occurring in September 2023.

With no new data projections related to either growth or inflation, the ECB’s decision was widely expected. The ECB’s president, Christine Lagarde, acknowledged in the press conference that eurozone growth had stagnated in the fourth quarter of 2023, but said growth would most likely pick up in the coming months. Meanwhile, the increase in the consumer price index, to 2.9% year-on-year in December, was anticipated by the Governing Council, due to base effects dropping out of the data.

Unemployment, at 6.4% across the eurozone, is at the lowest level since the inception of the euro, although data projects a slowing of advertised job vacancies in addition to the stabilisation of wage growth. We believe the Governing Council will wait for the release of more detailed data on 2024 wage settlements, due in the second quarter, with this data forming a key part of the June policy meeting.

During the press conference, President Lagarde was asked whether future rate cuts had been discussed. Her response was that the Governing Council believes that “it was premature to be discussing” such action, as rates needed to remain restrictive for as long as necessary to return inflation to target levels within the forecast horizon. This comment was followed by a hint of dovishness, with Lagarde expressing the view that the eurozone “is further along the disinflationary path”.

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 view that rate cuts at this stage would be premature suggests that yields will likely remain at their current levels as we progress through the first half of 2024.

With this meeting representing the third consecutive meeting where rates have been left unchanged, it likely marks the end of the ECB’s rate hiking cycle, and possibly the midpoint of the period before the first rate cut, which we believe could be in the early part of the summer.

Maturing securities in J.P. Morgan Asset Management’s euro liquidity strategies will continue to be concentrated towards the most profitable sector of the duration curve. With recent market pricing forecasting an earlier cut to interest rates than the ECB has alluded to, the euro strategies have seen a shortening of weighted average maturities, to avoid the risk of exposure to a significant amount of negative carry. As a result, our portfolios are well placed to maintain current yields and react to changing market dynamics as the market realigns to a slightly longer period of stable ECB rates.

Taking the above information into account, we believe investors will benefit from higher yields obtained from shorter durations, together with higher liquidity, while maintaining an active approach to cash management, and prioritising diversification and liquidity.

Source: J.P. Morgan Asset Management, as at 25 January 2024.

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