A view shows the logo of the European Central Bank (ECB) outside its headquarters in Frankfurt, Germany March 16, 2023. REUTERS/Heiko Becker/file photo
FRANKFURT – The European Central Bank raised its key interest rate to a record 4 percent on Thursday, but with the euro zone economy in the doldrums it signaled it would likely be its last measure in a fight of more than a year against the crisis. inflation.
The central bank of the 20 countries sharing the euro zone also raised its forecasts for inflation, which is now expected to fall more slowly towards its target of 2% over the next two years, while lowering those for economic growth.
This illustrates the dilemma the ECB faced at the meeting: prices continue to rise at more than twice the target rate, but with high borrowing costs and a slowdown in China, overall economic activity is in decline. difficulty.
READ: Inflation in Europe remained stable in August as the ECB remains open on rates
Against this backdrop, the ECB sent the message that it was probably done with raising rates, which led to a fall in euro zone bond yields and a rise in European stocks.
“Based on its current assessment, the Governing Council considers that the ECB’s key interest rates have reached levels which, maintained for a sufficiently long period, will make a substantial contribution to the rapid return of inflation towards “objective”, declared the ECB.
This is now expected to happen more slowly than in the ECB’s previous projections in June, with inflation estimated at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025.
ECB President Christine Lagarde did not completely rule out a further hike if necessary and said interest rates were likely to remain at restrictive levels for some time.
READ: Momentum builds for pause in ECB rate hikes as growth weakens – sources
“The focus will shift, in the future, towards duration, but that does not mean – because we cannot say it now – that we are at the maximum,” she declared during a press conference.
Lagarde acknowledged that some ECB board members had opposed the latest rate hike, but added: “There was a solid majority of governors in favor of the decision we took. »
Asked whether the ECB’s downward revision of its growth forecasts – with eurozone growth this year estimated at just 0.7% – meant a regional recession was now its base case , Lagarde insisted the slowdown was temporary.
“The recovery we had planned for the second half of 2023 has been pushed back over time,” she said. “We are confident that growth will resume in 2024.”
Sticky inflation
The upward revision of the inflation estimate for 2024 – announced earlier by Reuters – likely played a role in the discussions, with policymakers weighing the risk that inflation, currently still above 5%, will remain blocked at a high level.
READ: ECB expects eurozone inflation in 2024 to remain above 3% – source
Thursday’s 25 basis point increase brings the rate applied by the ECB on bank deposits to 4%, the highest level since the launch of the euro in 1999.
Just 14 months ago, this rate was stagnating at a record low of minus 0.5%, meaning banks had to pay to park their cash safely at the central bank.
Before this week’s meeting, money markets expected the deposit rate to peak at 4 percent before being cut in the second half of next year.
In contrast, markets have fully priced in unchanged rates at next week’s meeting of the US Federal Reserve, which started raising rates earlier and moved higher than the ECB.
Supporters of a hike this week likely argued it was necessary because inflation, including underlying measures that strip out volatile components, remains too high, with the recent surge in energy prices threatening a new acceleration.
READ: European Commission lowers growth forecast for Eurozone as Germany falls into recession
But the rapid tightening cycle – twice as pronounced as the ECB’s banking sector stress tests normally predict – has already left its mark on the eurozone economy.
With the manufacturing sector, which generally requires more capital to operate, already suffering from rising borrowing costs, lending to businesses and households has collapsed.
Services also began to struggle following a brief post-pandemic tourism boom.
The euro zone’s largest economy, Germany, was suffering the brunt of an industrial slowdown and heading into recession, according to several forecasts.
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