European Central Bank Suspends Interest Rate Hikes, Maintaining High Rates for Longer Period of Time
Frankfurt, October 27 (Xinhua News Agency) – The European Central Bank (ECB) has decided to keep the three key interest rates unchanged at its monetary policy meeting on October 26, after raising rates consistently for the past ten times. Analysts believe that this decision is in response to the falling inflation rate and the current market uncertainty in the euro area. While further interest rate increases are unlikely, interest rates will also not be cut soon.
The ECB announced that the main refinancing interest rate, marginal lending rate, and deposit mechanism interest rate will remain at 4.50%, 4.75%, and 4.00% respectively.
The decision to pause interest rate hikes was made due to increased geopolitical tensions, which have raised concerns about the medium-term inflation outlook. The ECB aims to maintain key interest rates in the euro area at a sufficiently high and restrictive level to promote a timely return of inflation to the medium-term target of 2%.
From July last year to September this year, the ECB raised interest rates by a total of 450 basis points, reaching a record high for the deposit mechanism interest rate among the three key rates. However, the inflation rate in the euro zone fell to 4.3% in September from 5.2% in August, with the core inflation rate (excluding energy, food, tobacco, and alcohol prices) dropping by 0.8 percentage points to 4.5%.
ECB President, Christine Lagarde, mentioned that while further interest rate increases are not ruled out, maintaining the current level of key interest rates for a sufficient period of time can help achieve the inflation target. She also stated that it is too early to discuss interest rate cuts.
Lagarde noted that the euro zone economy may continue to weaken throughout the year due to the impact of previous rate hikes. The effects of these rate increases are expected to last until at least the first quarter of 2024.
European Central Bank data shows that loan demand in the euro zone has weakened due to continued interest rate hikes. In August, the M3 money supply fell by 1.3% year-on-year, the lowest level since the establishment of the Eurozone. It continued to hover at a low level in September, falling by 1.2% year-on-year.
Financial experts have expressed their support for the ECB’s decision to suspend interest rate hikes. They believe that in the face of the risk of recession in the euro zone, pausing interest rate increases is the right approach. The lagging impact of previous rate increases should be fully observed before any further actions are taken.
However, some experts warn that the recent rise in bond yields, which has dragged down euro zone government bond prices, could threaten the stability of the financial system. Higher refinancing costs due to rising yields could create new risks, especially considering the high debt burdens in many economies.
Although the ECB is not expected to raise interest rates, the decision to maintain rates at current levels is seen as risky by some economists. They argue that the ECB should maintain the rates for as long as possible.
Deutsche Bank predicts that the current interest rate levels in the euro zone will be maintained until September 2024. As concerns of economic weakness grow, many institutional analysts expect the euro zone’s third-quarter gross domestic product (GDP) to show a contraction, which will be released next week.