ECB Holds Deposit Rate at 2.50%, Cites Energy Price Risks

The European Central Bank kept its three key interest rates unchanged on Thursday, Oct. 29. The Governing Council said in its monetary policy decision that it had "decided to keep the three key ECB interest rates unchanged." The deposit facility rate stays at 2.50%, the main refinancing operations rate at 2.65% and the marginal lending facility rate at 2.90%.

Energy prices ran through the ECB's explanation. "Energy prices have continued to rise, posing upside risks to the inflation outlook and downside risks to the growth outlook," the statement said. It added that underlying inflation has remained broadly stable so far and that wages do not show a material response at this stage. The council also said the greater size and length of the energy shock, along with indirect and second-round effects, are likely to drive up inflation and lower growth.

Financing conditions got a separate line. According to the ECB, they have tightened since the Governing Council's last meeting, which it said is likely to weigh on inflation and growth. The council said it is committed to setting policy so that inflation stabilises at its 2% target in the medium term.

The release also sets out how future decisions will be made. The Governing Council said it will follow a "data-dependent and meeting-by-meeting approach" to the policy stance. One sentence was blunter: "The Governing Council is not pre-committing to a particular rate path." Rate decisions will rest on the council's assessment of the inflation outlook and the risks around it, the statement said, together with underlying inflation dynamics and the strength of monetary policy transmission.

On the balance sheet, the ECB said the asset purchase programme and pandemic emergency purchase programme portfolios are declining at a measured and predictable pace, because the Eurosystem no longer reinvests principal payments from maturing securities. The Governing Council said it stands ready to adjust all of its instruments within its mandate. It also said the Transmission Protection Instrument is available against unwarranted, disorderly market dynamics.

The Commitments of Traders report is published weekly by the U.S. Commodity Futures Trading Commission. It shows futures positions held by groups of large traders as of Tuesday, usually released the following Friday. The latest euro figures are as of Oct. 20 and were released Oct. 23, so the positions were held before the ECB announcement.

In CME euro FX futures, large speculators (non-commercial) were net short 134,524 contracts as of Oct. 20, against a net short of 137,573 contracts a week earlier. The weekly change was 3,049 contracts, equal to 0.3% of open interest of 877,940 contracts. The move was larger than 12% of weekly moves in the 3-year window.

The 3-year COT index places the latest net position within its range over the past 3 years, where 0 is the lowest net position in that window and 100 the highest. The euro reading is 1. The 3-year low was a net short of 137,573 contracts on Oct. 13, and the 3-year high was a net long of 180,305 contracts on Feb. 10. Euro futures are priced in US dollars per euro, so a net long position would be a bet on a higher EUR/USD.

The ECB said its President would comment on the considerations behind the decisions at a press conference starting at 14:45 CET on Oct. 29.