The European Central Bank (ECB) announced on Thursday a halt to its rate-hike program, a move that comes after a 15-month streak of incremental increases that pushed borrowing costs to historic levels. The decision was reached at the ECB’s governing council meeting in Athens, with the main refinancing operations rate, which sets weekly borrowing costs for commercial banks, remaining steady at 4.5%. Additionally, the marginal lending facility rate was left unchanged at 4.75%.
This move mirrors similar actions taken by the Bank of England and the US Federal Reserve, both of which had already put the brakes on their own rate-hike initiatives. The decision is rooted in the recent shift in inflation, which fell to 4.3% in the year ending September, down from 5.2% in August. ECB President Christine Lagarde acknowledged that this decline in inflation is a direct result of tightened monetary policy affecting demand and corporate pricing power. Nonetheless, this figure still surpasses the ECB’s targeted inflation rate of 2%.
The decision to maintain the ECB rate at 4% is anticipated to trigger a debate over how long this rate should persist. Some markets are already speculating a potential rate cut as early as June. Marcus Brookes, Chief Investment Officer at Quilter Investors, cautioned about the impending pressure to reduce rates, stating, “The problem facing central banks now is that they have successfully guided economies to this level of rates without tipping them into full-blown recessions, although Germany is experiencing one and others will have felt like they were in one. So how long can rates really remain at this level before things really start to bite?”
The eurozone economy’s elevated and uncertain interest rates place central bankers in a precarious position, as they aim to calibrate their monetary policies for optimal impact without pushing the economy into a full-scale recession. This pause in rate hikes underscores the acknowledgement of the prevailing uncertainty confronting central banks globally. They are tasked with delicately balancing economic growth with inflation concerns.
In summary, the ECB has decided to halt its extensive rate-hike program, having elevated borrowing costs to unprecedented levels. This move echoes actions taken by the Bank of England and the US Federal Reserve. This decision follows a notable drop in inflation to 4.3% in the year concluding in September, yet it still exceeds the ECB’s 2% target. Central bankers are now tasked with navigating the uncertain global economic climate, carefully weighing economic growth against inflation concerns.
Source: Bloomberg
