Lagarde speech: Quite clear path ahead for rates

Key rates were held steady at the October policy meeting. European Central Bank (ECB) President Christine Lagarde outlines the reasons behind the decision and takes questions from the press.

Policy highlights

"The inter-meeting period will be information-rich."

"Six weeks of additional time will give us a lot more information."

"Underlying inflation will probably take particular standing in decision."

"We look at the 10-year but also at entire bond curve."

"Debt issuance by hyperscalers plays a role in yield rise."

"Countries with high debt have to factor into fiscal policy plan that rates are higher, will probably remain higher."

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"Fiscal plans have to comply with EU fiscal framework."

"Should market developments threaten transmission, we have instruments to respond."

"Direction of travel is quite clear on rates."

"We have no plan to restrict number of meetings."

"Business continuity has never failed at ECB, confident it will continue."

Interest rates: key questions

Interest rates explained

Financial institutions charge borrowers interest on loans and pay interest to savers and depositors. These rates reflect base lending rates set by central banks as economic conditions change. Maintaining price stability is normally part of a central bank’s mandate. In most cases, this involves targeting core inflation of around 2%. To encourage lending and support economic activity, a central bank may reduce base lending rates when inflation is below target. Conversely, inflation substantially above 2% normally prompts an increase in base lending rates to bring price growth down.

Interest rates and currency strength

By making a country more attractive to international investors seeking a place for their funds, higher interest rates generally support its currency.

Interest rates and Gold prices

Holding Gold rather than an interest-bearing asset or a bank deposit carries a greater opportunity cost when interest rates rise. Higher rates therefore tend to put downward pressure on Gold prices. High interest rates also usually strengthen the US Dollar (USD). As Gold is priced in Dollars, a stronger Dollar has the effect of reducing its price.

The Fed Funds rate explained

US banks lend to one another overnight at the Fed funds rate. Set by the Federal Reserve at its FOMC meetings, it is the headline rate frequently cited in market coverage. The rate is expressed as a range, such as 4.75%-5.00%, but the quoted figure is the upper bound, in this example 5.00%. The CME FedWatch tool tracks market expectations for the future Fed funds rate. Those expectations shape behaviour across many financial markets ahead of Federal Reserve monetary policy decisions.