The headquarters of the European Central Bank.
Daniel Roland | Afp | Getty Images
The European Central Bank ended its series of interest rate hikes on Thursday, despite new upside risks to inflation in oil markets in the wake of the Israel-Hamas war.
The key interest rate is expected to remain at a record high of 4%, where it was reached by ten consecutive increases starting in July 2022, pushing rates into positive territory for the first time since 2011.
The Governing Council said the latest information confirmed its medium-term inflation forecast of 2.1%.
“Inflation is still expected to remain too high for too long and domestic price pressures remain strong. At the same time, inflation fell significantly in September, also due to strong base effects, and most measures of underlying inflation have weakened further,” it said in a statement.
Markets had priced in a greater than 98% chance of a hold after the ECB gave strong indications at its last meeting that interest rates had peaked.
The euro was 0.15% lower against the British pound at 1:40 p.m. London time, weakening slightly after the announcement. The European currency lost 0.2% against the US dollar.
Discussion about interest rate cuts “premature”
The bank’s interest rate hike in September was described as a moderate increase as the ECB said interest rates had reached a level that, if “maintained for a sufficiently long period of time”, would make a significant contribution to the fight against inflation in a timely manner.
She reiterated that message Thursday, saying her decision-making continues to be based on data.
Governing Council members stressed in interviews that interest rates are “higher in the longer term” while stressing that an inflation shock could prompt them to raise rates again as they try to temper market expectations for rate cuts from the middle of next year.
When asked how long interest rates need to remain at current levels, ECB President Christine Lagarde told CNBC’s Annette Weisbach: “We are referring to a timely and sufficiently long interest rate policy. But in the same breath I say that we will be data dependent. At this point in our evolution, battling inflation and after ten consecutive rate hikes, now is not the time for forward-looking guidance.”
Lagarde said the issue of interest rate cuts had not been discussed in the ECB’s Governing Council.
“Even a discussion about cuts is completely premature. Right now we are saying that we are steadfast, we have to persevere,” she said.
The ECB needs to evaluate data in areas such as wage negotiations, which will not be published until 2024, she added.
Higher for longer
The ECB’s decision is in line with major central banks around the world, which are widely believed to have already reached or are close to their maximum interest rate. The Bank of England, the Swiss National Bank and the US Federal Reserve all decided to maintain interest rates in September.
The ECB needs to keep monetary policy tight enough to meet its current inflation forecasts of 5.6% this year, 3.2% next year and 2.1% in the “medium term”.
However, the central bank also faces continued weak business activity and muted growth forecasts for the euro zone of 0.7% in 2023 and 1% in 2024 as former EU powerhouse Germany stagnates.
Lagarde confirmed that she is also assessing volatility in the bond market, where yields have risen sharply, reflecting a global sell-off.
Marcus Brookes, chief investment officer at Quilter Investors, said inflation risks remain in wage growth and rising energy prices due to uncertainty in the Middle East.
“Going forward, it will join other central banks in saying that the market can expect higher interest rates for longer, leaving the door open if inflation rises again,” Brookes said in an email statement.
“However, given the stagnant economy and the fact that other central banks have gone into a holding pattern, something very unexpected would have to happen for rates to be raised again. The pressure will quickly shift to interest rate cuts due to the lack of economic growth.”
Source : www.cnbc.com