- ECB Raises Deposit Rate to 4% Amid Inflation Battle
- Varying Inflation Challenges Across Eurozone
- ECB Indicates Potential End to Rate Hikes, but Inflation Remains a Concern
The Bank has increased its deposit rate by 0.25 percentage points to 4%. Interest rates may have peaked, but commentators expect them to stay put for months.
To battle inflation, the European Central Bank’s benchmark interest rate is at its highest level since the euro’s 1999 inception.
At the most recent meeting of the governing council, which administers monetary policy for the twenty countries using the European single currency, the Bank’s deposit rate was increased by 0.25 percentage points to 4%.
Given the persistent inflation in many euro-using nations, financial markets and economists had predicted that the decision would be close.
The euro area inflation rate in August was 5.3%, more than above the central bank’s 2% target.
Diverse challenges confronting each member state confound the ECB’s “one-size-fits-all” policy approach.
For instance, many in the Eastern Bloc continue to experience double-digit inflation rates.
Similarly, members such as Belgium and Spain are experiencing a rate of price inflation that approaches 1 percent.
Germany, Europe’s largest economy, and the Netherlands, which are already in recession, face a particularly troubling prospect from rising interest rates because they are designed to stifle economic demand.
In a statement, the Bank implied that rate increases may have reached their apex.
“The Governing Council considers that the key ECB interest rates have reached levels that, if maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” it said.
Commentators also noted that no additional price increases appeared likely.
Andrew Kenningham from Capital Economics stated that the ECB’s announcement “probably brings the current tightening cycle to an end.”
He added, “However, given the strength of underlying inflation, we anticipate that interest rates will remain at this level for at least a year, even though the economy appears to be entering a recession.”
According to Neil Wilson, the chief market analyst at Finalto, “the ECB believes it is over and that we have reached the peak in interest rates.”
European Central Bank head Christine Lagarde said, “We are not saying that we have reached the peak.”
She stated at a press conference on Thursday, “The fight against inflation that we are conducting is making progress. And what we’re doing today is an attempt to consolidate that progress.
“In October, the [inflation] rate was 10.6%; it is now 5.3%, so it has decreased by half.
“Is it acceptable? No. Because, according to our projections, it is anticipated to remain too high for too long. But inflation has declined, and we wish for this trend to persist and be reinforced.”
She added, “We’re not doing this to force a recession, but because we want price stability for those who are bearing the brunt of inflation and high prices – primarily those who are not the most privileged.”
In addition to the rate hike, the ECB cut its euro area growth forecast for this year to 0.7% from 0.9%.
However, Ms. Lagarde deflected questions regarding a potential impending recession and stated that the slowdown would be temporary.
“The anticipated recovery for the second half of 2023 has been put back. We are optimistic that development will accelerate in 2024,” she continued.