The European Central Bank (ECB) has finally ended 10 consecutive rate hikes as growth looks set to slow across the bloc in the coming months.Thank you for reading this post, don't forget to subscribe!
Today’s decision means benchmark interest rates in the eurozone were kept between four per cent and 4.75 per cent, their highest level in 22 years.
In a statement today, the ECB said that “key ECB interest rates remain at levels that, if maintained over a sufficiently long period, would make an important contribution to returning inflation to the two per cent target”.
“Inflation is still expected to remain very high for a very long time, and domestic price pressures remain strong. “At the same time, inflation declined significantly in September, including a strong base effect, and most measures of underlying inflation have continued to decline,” the central bank said.
This decision is not a surprise. The ECB had raised rates at its last meeting, but minutes released earlier this month showed the decision was an “impartial decision”.
Aggressive monetary tightening by the central bank has helped reduce inflation and slowed economic activity.
Inflation in the eurozone eased to 4.3 percent in September, down from 5.2 percent in August and the lowest level since October 2021.
Although the eurozone grew 0.3 percent in the second quarter, recent data points to a decline in the third quarter. According to S&P, private sector activity declined to 46.5 in October from 47.2 in September. Economists had expected a rise to 47.4.
The ECB’s bank credit survey also showed that lending standards have been further tightened, leading to a sharp decline in credit demand among both households and firms.
Bert Colligen, senior economist at ING, said the survey showed that monetary transmission was working “rather vigorously”.
At a press conference after the decision, ECB President Christine Lagarde said, “The economy is likely to remain weak for the remainder of this year. But as inflation falls further, household real incomes improve and As demand for euro zone exports grows, the economy should strengthen in the coming years.
With clear signs that interest rates are beginning to have a decisive impact, the question now will be how long to leave rates high.
In a sign of its determination to bring inflation down to target, the ECB said, “policy rates will remain set at a sufficiently restrictive level for as long as necessary”.
But Mark Wall, chief European economist at Deutsche Bank, commented: “The question is how long is long enough?”
Lagarde was unwilling to address this question. “At this point in our fight against inflation, and after 10 consecutive hikes, now is not the time for further guidance. Now is the time to really stick to weaving our data reliance, and we will do that,” she told reporters.
As both the Fed and the Bank of England announce the next rate decisions, the market expects both to keep rates unchanged.