The European Central Bank froze borrowing costs again on Thursday but warned that inflation could pick up again in the near term, in an apparent pushback against market hopes of early rate cuts in 2024.
The second consecutive pause keeps the ECB's benchmark deposit rate at a record high of four percent following a historic streak of hikes to tame runaway prices.
The Frankfurt institution said rates were at levels that if "maintained for a sufficiently long duration" would make a "substantial contribution" to bringing inflation back down to the two-percent target.
Eurozone inflation slowed faster than expected in November to a two-year low of 2.4 percent, after peaking at around 10 percent last year.
But the ECB cautioned against declaring victory too soon.
"While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term," it said, amid concerns about rising wages in the 20-nation currency club.
The ECB's warning will likely be aimed at cooling investor expectations of faster rate cuts in 2024.
Speculation had mounted after the US Federal Reserve held its rates on Wednesday and indicated that it expected three rate cuts next year.
The much-sought-after dovish tilt sparked a broad markets rally with Wall Street soaring to record highs.
But analysts expected ECB president Christine Lagarde to use her press conference later Thursday to push back against hopes of a similar signal from Frankfurt.
"Markets will probably have to correct some of their over-optimistic rate cut expectations once the ECB has spoken," said Berenberg bank economist Holger Schmieding.
The Bank of England found itself in a similar position on Thursday. It too left its key rate unchanged, at 5.25 percent, and warned that the rate would remain high "for an extended period" to tackle inflation.
"Unlike the Federal Reserve, the Bank of England is clearly reluctant to endorse market pricing for rate cuts in 2024," said ING economist James Smith.
UK inflation slowed sharply to 4.6 percent in October but remains well above the two-percent target.
- Swiss pause, Norwegian hike -
The ECB reiterated that its next moves would be "data dependent" as it unveiled its latest economic forecasts.
The bank said eurozone inflation was now seen slowing to 2.7 percent in 2024 rather than the previously projected 3.2 percent.
In 2025, it will drop further to 2.1 percent, before dipping under two percent in 2026.
The bank also trimmed its growth forecasts, as the impact of higher rates takes its toll.
Growth is expected to come in at 0.6 percent this year, down from a previous forecast of 0.7 percent, the bank said. For 2024, the figure was 0.8 percent, down from 1.0 percent.
While many analysts initially expected the ECB to start slashing rates in June, the recent slump in inflation has prompted some to predict a first reduction as early as March or April.
The weakening economy has provided further ammunition for those arguing for a cut sooner rather than later.
Rate cuts 'not discussed at all'
European Central Bank president Christine Lagarde said the bank's governors did not "discuss rate cuts at all" at their meeting on Thursday, warning policymakers should not "lower our guard" in fighting inflation.
"Should we lower our guard? No, we should absolutely not lower our guard," Lagarde told a press conference.
The ECB on Thursday also announced that it would take further action to reduce its balance sheet, pressing another lever in the fight against inflation.
The bank said it will hasten the phase-out of its pandemic-emergency bond buying programme (PEPP), by ending the reinvestment of maturing bonds by the end of 2024.
On a bumper day for central banks in Europe as 2023 draws to a close, the Swiss National Bank earlier announced it was holding its key interest rate at 1.75 percent.
Norway's Norges Bank meanwhile bucked the pausing trend by raising its main interest rate by a quarter percentage point to 4.5 percent. It signalled, however, that the hike was likely the final one in the current cycle.