In brief

• At its monetary policy meeting on 26 October 2023, the European Central Bank (ECB) kept all key interest rates on hold, the first pause after 10 consecutive rate rises.


• The ECB acknowledged that “the economy is weak”, but with inflation “still too high”, it will be wary of calling a victory in the battle with price pressures.


• Notably, the ECB did not discuss changes to the reinvestment of Pandemic Emergency Purchase Program (PEPP) maturities or the Minimum Reserve Requirements (MRR).

What the ECB said

At the conclusion of its October 2023 monetary policy meeting, 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 first pause following 10 consecutive rate increases, where the deposit rate increased 450 basis points (bps) from -0.5% to 4.00% over a 14-month period.

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 at 26 October 2023.

The decision to pause was widely expected, as inflation within the eurozone has “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. In particular, the financial sector has witnessed significantly tighter lending conditions via higher borrowing costs.

Eurozone purchasing managers’ index data fell further into restrictive territory, providing more evidence of reduced demand. The manufacturing sector was particularly weak, falling to 43.0 from 43.4 and services shrinking to 47.8 from 48.7. M3 money supply has also declined over the past two months -1.3% in August and -1.2% in September.

However, President Lagarde retained a mildly hawkish tone, noting that “inflation… is still too high". The ECB still believes that holding rates at sufficiently restrictive levels over a sufficiently long duration will make a “substantial contribution” to bringing inflation back to within the central bank’s 2% target level over the forecast horizon. Lagarde also confirmed she would not rule out additional rate hikes and stressed that it was premature to discuss rate cuts.

What the ECB didn’t say

In the run up to the meeting, the market speculated on whether the ECB would make changes to the PEPP reinvestments or the MRR. Lagarde confirmed that the Governing Council (GC) didn’t discuss either topic, and the forward guidance on the PEPP remains unchanged, with maturing securities continuing to be reinvested until at least the end of 2024. A number of GC members had recently suggested that an increase in the MRR from the current 1% could be appropriate. These reserves earn 0% at the ECB and any increase would serve to save a significant amount on the deposit interest payments the ECB is required to pay.

Finally, eurozone banks have continued to repay borrowings under the ECB’s Targeted Longer-Term Refinancing Operation (TLTROs) and the ECB continues to monitor and stand ready to adjust all of the instruments within its mandate to ensure the timely return of inflation to its target level. The final TLTRO repayment is due at the end of 2024 and a significant amount of the total borrowings have already been repaid, with just 15% outstanding.

Exhibit 2: TLTRO total borrowings and the current outstandings

Source: J.P. Morgan Asset Management and ECB, as at 26 October 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. Nevertheless, 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 maintaining a shorter weighted average maturity during this current hiking cycle, our portfolios are well placed to increase the duration of term investments and lock in the higher yields.

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.

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