Euro rates on hold, US economy ended 2023 on a firm note

ECB seemingly happy with its present hawkish bias while US GDP figures top forecasts, allaying some inflation worries.

25 January 2024

The European Central Bank (ECB) kept to the script today in its policy decision, leaving rates unchanged. Citing its view that the effective policy rates where they currently are is dampening demand and having the resultant effect in pulling down inflation sounds like a huge self-congratulatory clap on the back. Futures markets are pricing in cuts from the ECB starting in March and extending throughout the year to the tune of 150 bps of cuts in total. This is based on the assumption that the ECB will be forced to react to demand falling off quicker than they forecast. The Euro area’s two largest economies are certainly not showing many signs of demand stability and it may be that ECB President Christine Lagarde would do well to acknowledge that.

US GDP rose in the fourth quarter of last year at an annual 3.3% clip, way ahead of most economists’ forecasts of 2.0%. No recession concerns here and to make matters even better we cannot see any accompanying blow-out growth in prices that are used in the GDP calculation – the GDP Price Index (aka Deflator) only increased by 1.5% over the quarter. Stronger growth without inflation is what everyone (including the central banks) wants.