Rates: ECB takes a break but still monitors inflation

The European Central Bank (ECB) has let its rates remained unchanged on Thursday, after ten increases in a row, warning that inflationary risks, accentuated by the war in the Middle East, are still too high to consider the slightest reduction .

After raising its key rates to their highest historic level, this pause in the unprecedented cycle of monetary tightening, launched in July 2022, was expected by the markets.

The guardians of the euro, which are met on Thursday in Athens, want to give themselves time to assess the direction the economy is taking in the euro zone.

Since September and the tenth turn of the screw in a row given by the ECB, the economic situation has darkened while inflation has accentuated its decline, going from 5.2% in August to 4.3% in September, in year-on-year, to return to its October 2021 level.

This is a sign that there is already “a very strong transmission of monetary policy, in the banking sector in particular, and that the financing of the economy is directly affected,” underlined Ms. Lagarde.

Other effects on the economy “are to come”, she predicted while the ECB's objective is to tighten access to credit, for households and businesses, in order to weigh on demand and to stem the price increases which have soared over the past 18 months.

ECB interest rates © AFP – Sylvie HUSSON, Samuel BARBOSA

The main key rate remunerating deposits, the benchmark for credit in the euro zone, is thus maintained at the historically high level of 4.00%. The refinancing rate and the marginal lending rate stand at 4.50% and 4.75% respectively.

The ECB's message is that “patience is now the key”, analyze the economists of Deutsche Bank.

“We must be stable and hold on”, insisted Christine Lagarde to the press.

– Rates on a plateau –

The pause in monetary tightening should also make it possible to better assess the effect of geopolitical tensions linked to the war between Israel and Hamas, which are raising fears of a surge in the cost of oil and energy.

The European Central Bank (ECB) is “very attentive” to the economic risk posed by this conflict, which is added to the upheavals caused since February 2022 by the war in Ukraine, said Ms. Lagarde.

the President of the ECB, Christine Lagarde, and the Governor of the Central Bank of Greece, Yiannis Stournaras, during a press conference, October 26, 2023 in Athens © AFP – Aris Oikonomou

The prices of energy prices have become even “less predictable” and “increased geopolitical tensions could push them up in the short term,” she observed.

In this context, there is no point waiting for the next rate cut, even if weak activity raises fears of a contraction in the euro zone's gross domestic product in the third quarter.

“Have a discussion on a reduction is totally premature for the moment”, according to Ms Lagarde who also did not rule out other rate increases if the economic situation requires it.

“It is only in keeping rates at their current restrictive level for long enough that the ECB can be confident that inflation will return to its 2% target,” comments Mark Wall, economist at Deutsche Bank.

The ECB is “settling on a plateau”, however, believes Holger Schmieding from Berenberg. “In the absence of any major surprises, rates will remain at their current levels for the foreseeable future,” he believes.

“It is too early to lower interest rates,” agrees Clemens Fuest of the German economic institute IFO. “For this to happen, inflation must continue to fall. Partly due to high wage agreements and risks linked to energy prices, this is not guaranteed to happen.”

En December, the monetary institution will be able to decide based on the latest inflation figures and a new set of economic projections for 2026.

Most economists do not expect a drop in rates, at the earliest before the second half of 2024. “The ECB has no room to lower its rates next year”, given the still present risk of inflation, assures Jörg Krämer, economist at Commerzbank.

All reproduction and representation rights reserved. © (2023) Agence France-Presse