Analysis-ECB throws markets crumbs of comfort against a turbulent backdrop

European Central Bank (ECB) headquarters in Frankfurt · Reuters

By Yoruk Bahceli and Naomi Rovnick

(Reuters) - The European Central Bank steered clear on Thursday of signalling any big policy shifts that could have unsettled investors that are already grappling with a raft of risks from war, oil prices and tighter credit conditions.

The ECB paused an unprecedented hiking cycle in which its main rate has risen to a record 4%, from below 0% in July 2022, as inflation slows and the bloc's economy deteriorates.

That was a relief to financial markets, roiled in recent weeks by a surge in government bond yields led by U.S. Treasuries.

Crucially, the ECB did not discuss any changes to a key bond-buying scheme that it uses to support more vulnerable member states like Italy, whose debt has come under pressure in recent weeks.

The central bank reiterated it would reinvest all the cash it receives from maturing bonds it holds under its 1.7 trillion euro pandemic-era bond scheme until the end of 2024.

Several policymakers have already floated an earlier end to those investments, which give the ECB more discretion to decide where to deploy them. To many investors' relief, this issue didn't make the agenda, President Christine Lagarde said.

Similarly, the ECB also did not discuss further cuts to the interest it pays on commercial banks' deposits, a move Reuters had previously reported some policymakers are considering pushing for next spring.

"Lagarde had one mission and she delivered to that. She didn't want to rock the boat, and she delivered," said Piet Christiansen, chief analyst at Danske Bank in Copenhagen.

Euro zone government bond prices rallied and yields dropped, led by Italy, while the euro held around $1.053.

The risk premium the Italian government pays over German bonds dropped below 200 basis points, a level that was breached for the first time in months in September, after a rise in Italy's budget deficit target sparked concerns.

Euro zone bank shares, which dropped sharply earlier on Thursday, cut most of their losses, also helped by faster-than-expected U.S. growth during the third quarter.

Lagarde said little about the Hamas-Israel war to unsettle markets. The Bank of Canada kept rates on hold on Wednesday, but the ECB was the first of the biggest central banks to set policy since the conflict broke out on Oct 7.

Investors have, so far, shown little sustained reaction to a conflict that could threaten energy supply if it escalates, lifting inflation just as central banks are trying to stamp it out.

The euro zone is heavily dependent on energy imports, which leaves it more vulnerable to geopolitical upheaval. The risk on Thursday was that any hawkish messaging around oil prices could have raised expectations for a further rate hike.