The European Central Bank (ECB) opted to maintain its key interest rate on Thursday at a historically high level. The ECB stated that it would continue to keep the rate unchanged as long as it deemed necessary to combat inflation, indicating that rate cuts were not on the immediate horizon, despite expectations of potential adjustments in the coming year to support a contracting economy.
This decision aligns with recent choices made by other central banks, including the U.S. Federal Reserve (Fed), the Bank of England (BoE), and the Swiss National Bank, all of which also elected to leave their interest rates unaltered. Notably, the Fed went a step further by hinting at the possibility of three rate cuts in the upcoming year.
Regarding its future actions, the ECB has divulged limited information. It has maintained its benchmark interest rate at 4 percent and reiterated its commitment to making decisions based on the latest economic indicators and data.
“Should we lower our guard? We asked ourselves that. No — we should absolutely not lower our guard,” Lagarde told a news conference after the decision. However, she firmly stated that lowering guard should never be considered. Lagarde highlighted that policymakers had not discussed the possibility of rate cuts at all. She further underlined that future decisions would prioritize maintaining prices at sufficiently constrained levels for as long as necessary.
In the aftermath of the COVID-19 pandemic and Russia’s conflict with Ukraine, central banks worldwide have implemented substantial interest rate hikes to curb inflation. Today, they face the challenge of striking a delicate balance between keeping interest rates elevated for a significant duration to contain inflation and averting the risk of pushing their economies into recession due to higher borrowing costs.
Read more: Markets anticipating a hot week…Lagarde testifies in Brussels today
Decline in EU inflation rate
In November, inflation in the 20 European Union (EU) countries that utilize the euro currency declined beyond initial expectations, reaching 2.4 percent. This marked a significant decrease from its peak of 10.6 percent in October 2022. The current inflation rate is relatively close to the ECB target of 2 percent, which is considered ideal for the overall economy.
Analysts have consequently anticipated that the ECB will implement interest rate cuts next year, although the exact timing remains uncertain. Projections vary, with estimates ranging from anywhere between March and September for this policy adjustment.
Despite the deceleration in inflation following a series of interest rate hikes, economic growth was hindered by the high cost of borrowing for activities such as home purchases and business investments in new offices and factory equipment. As a result, the eurozone experienced a contraction in economic output of 0.1 percent during the July-September quarter.
Simultaneously, wages are gradually catching up with the soaring prices in stores. However, this development has not translated into increased consumer optimism, even as European city centers adorn themselves with Christmas lights.
Bank of England
During its final meeting of the year, BoE announced on Thursday that it would maintain interest rates at a 15-year high. The bank emphasized that British interest rates should remain elevated for “an extended period.”
Since August, the interest rates have remained unchanged at 5.25 percent, following a series of 14 consecutive increases that began in December 2021.
While other central banks, including the Fed, have indicated a possible shift in their stance by signaling potential rate cuts, the BoE’s resolute position against such discussions in Britain is being questioned in the markets.
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