The European Central Bank has halted its most aggressive cycle of raising interest rates since the euro was introduced. The decision was made based on the belief that previous increases have been effective in addressing inflation, as concerns about the eurozone economy continue to rise.
As anticipated by financial markets, the ECB chose not to change its main policy rates for the first time in over a year. This puts a stop to a series of 10 consecutive raises in borrowing costs.
As worries increase about the effects of past increases on European economies, there are warnings of a potential recession in the eurozone due to a decline in Germany’s manufacturing sector. In October, business activity in Germany experienced its fourth consecutive month of contraction.
“The economy is expected to continue to be in a fragile state for the rest of the year,” stated Christine Lagarde, the president of the ECB. “However, with a decrease in inflation, an improvement in household incomes, and an increase in demand for exports from the euro area, the economy is anticipated to strengthen in the upcoming years.”
Due to inflation being more than double the central bank’s desired level, economists anticipate that interest rates will stay high for an extended period in order to decrease price increases throughout the 20-country region.
Lagarde acknowledged that energy prices have become more uncertain due to escalating geopolitical tensions during the Israel-Hamas conflict. This is a significant concern for financial markets as it could potentially affect inflation and global economic growth.
She stated that the current political tensions may result in an increase in energy costs in the short run and create a more unpredictable outlook for the future.
The European Central Bank announced its commitment to achieving a 2% inflation target in the medium-term. It stated that its main interest rates, if kept at their current levels for a significant period of time, will greatly aid in reaching this objective.
The most recent announcement, made following the European Central Bank’s meeting in Athens regarding monetary policy, maintains the key deposit rate at 4%, which is the highest it has been since the launch of the euro in 1999.
The primary rate for refinancing operations, which supplies the majority of funds to the banking system, remained at 4.5%. The rate for the lending facility, which provides short-term credit to banks, also remained at 4.75%.
The inflation rate in the eurozone dropped significantly in September to 4.3%, a decrease from August’s rate of 5.2%. This is a significant drop from the 9.9% rate that was recorded a year ago, which was caused by the rise in global energy prices due to the Russian invasion of Ukraine.
The ECB announced that although inflation is projected to remain unreasonably high, their past increases in interest rates have been suppressing demand and will eventually contribute to its decrease.
Unfortunately, increased expenses for borrowing, consistently high costs for energy, and a broader decrease in global trade are all negatively affecting the economy of the eurozone. This is particularly evident in Germany, which is the largest economy in Europe and is experiencing significant difficulties as a result.
Surveys of business indicate that private sector activity in Germany declined for the fourth consecutive month in October due to a significant decrease in manufacturing output. This suggests that the country may already be in a recession.
The central bank of Germany, known as the Bundesbank, announced on Monday that it predicts a decline in the country’s economy during the third quarter of 2023.
In the second quarter, Germany did not experience any growth, and in the first three months of the year, it experienced a contraction of 0.1%. According to economists, a recession occurs when there are two consecutive quarters of declining economic output.
The euro area experienced a 0.2% growth in the second quarter, with France and Spain showing a stronger performance. This highlights the difficulty faced by the ECB in bringing inflation back to target across the 20 countries in the bloc.
The choice to maintain current borrowing rates puts the ECB in line with the US Federal Reserve and Bank of England, as the top global central banks pause to reassess after a period of significant interest rate hikes.