LAST UPDATE | 26 Oct 2023
THE EUROPEAN CENTRAL Bank has held interest rates steady for the first time since July 2022.
The decision ends a streak of 10 straight hikes that has seen interest rates climb faster and further than ever.
Since July 2022, the ECB has cranked rates up by 450 basis points to tackle inflation driven in large part by surging energy prices in the wake of Russia’s invasion of Ukraine.
The long-tightening cycle has left the key deposit rate at 4%, its highest mark in the history of the central bank.
It was expected that the interest rates would be left unchanged as previous policy moves seemed to be biting.
Eurozone inflation has started to settle in recent months, falling to 4.3% in September from its double-digit peak towards the end of last year.
While the figure is still more than twice the ECB’s target of 2%, rising borrowing costs have also shown signs of weighing on the currency bloc.
The Frankfurt-based institution’s September economic projections revised down the forecast for growth in the eurozone, while the outbreak of the conflict in the Middle East has further clouded the horizon.
As such, the ECB was unlikely to “seriously” think about raising rates again at the moment “amid rising uncertainty over the global outlook”, said Pictet analyst Frederik Ducrozet.
ECB policymakers were in “watch and see” mode today, Ducrozet said, with new official forecasts only set to be published at the governing council’s next meeting in December.
The most recently released economic data, however, painted a pessimistic picture of the eurozone that could encourage policymakers to hold off from more hikes.
Business activity in the bloc slumped in October, according to a closely watched Purchasing Managers’ Index (PMI) survey put out by S&P Global, raising the possibility of a mild recession in the second half of 2023.
Eurozone banks have also been tightening their lending criteria for households and businesses, according to the ECB’s own survey of financial institutions published this week.
“Weaker economic conditions and higher interest rates are having a clear impact”, said ING economist Bert Colijn.
The borrowing squeeze was a sign that the ECB’s monetary policy was feeding through “forcefully” to the economy, Colijn said.
A good reason not to hike further, he suggested, “especially given the fact that the ECB itself only expects the biggest impact of higher rates in early 2024″.
The central bank could meanwhile consider winding down its balance sheet faster than currently planned to further apply the brakes on inflation.
ECB President Christine Lagarde has acknowledged the “pain” felt by consumers as a result of aggressive rate hikes but had cautioned against relenting too soon.
While inflation has come down, the ECB does not expect it to return to the target of 2% before 2025, according to its most recent projections.
Jack Allen-Reynolds of Capital Economics said holding rates at their current levels this week could be presented as a temporary “pause” but there was every chance of the pause becoming a “plateau”.
The question now, according to Pictet analyst Ducrozet, was “how long policy rates should be kept at current levels”.
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