Growth outlook continues to deteriorate
The European Central Bank (ECB) has decided to raise interest rates again by a quarter of a point to record its highest rates since the introduction of the euro in 1999. A tenth consecutive rate hike by the European Bank means a deposit rate rises to a record four percent.
The interest rate on major refinancing operations has now risen to 4.50 percent and on the marginal lending facility to 4.75 percent.
The central bank said rates have now reached levels that will help bring inflation back to its target of 2 percent, while some analysts saw the move as an indication that the current cycle of raising rates is coming to an end.
The increase was the tenth in a row since the central bank launched its biggest-ever rate hike in July last year after prices rose in the wake of Russia’s war on Ukraine.
One of the main reasons for the rise appears to be upward revisions to the newly published macroeconomic forecast for employees in the eurozone, which sees inflation averaging at 5.6 percent this year from the previous forecast of 5.4 percent, and 3.2 percent next year from the previous forecast of 3 percent.
However, the closely watched medium-term outlook pushed it down,from 2.2 percent to 2.1 percent.
Ahead of the meeting, analysts were sharply divided on whether the bank would raise rates again or refrain for a while due to growing signs of economic pressure on the 20-year-old countries that use the euro.
But eventually, worsening inflation pressures convinced the board of the need to raise the rate again. Announcing the decision, the ECB said: “Inflation continues to decline, but it is still expected to remain high for a very long time.”
“Some board members didn’t come to the same conclusion, and some conservatives preferred to pause and keep future decisions again. It could have produced more certainty, more information, about the passage of time and the impact of many of our previous decisions,” ECB President Christine Lagarde said at a press conference following the announcement.
“But I can tell you that there is a strong majority of Conservatives to approve the decision we made,” she added.
Lagarde said there is no definitive answer on whether the rate hike is over because the board is still relying on data. But she stressed that the ECB’s current thinking has been encapsulated in the statement on interest rates at current levels, making it a “significant contribution” to the fight against inflation if it lasts long enough.
The growth outlook has continued to deteriorate, and the ECB now expects an expansion of just 0.7 percent in 2023, after forecasting 0.9 percent growth three months earlier.
“The economy is likely to remain weak in the coming months, and it remained broadly stagnant during the first half of the year, and recent indicators suggest that it was also weak in the third quarter,” Lagarde said.
“Lower demand for eurozone exports and the impact of tighter financing conditions are dampening growth, including through lower residential and commercial investment.
The services sector, hitherto resilient, is now also weakening. Over time, economic momentum is expected to rebound, as real income is expected to rise, supported by low inflation, rising wages, and a strong labor market. This would support consumer spending.”