- The European Central Bank’s key interest rate will remain unchanged at 4% after it opted to pause it in October after 10 consecutive rate hikes.
- The ECB reiterated its message that current levels of interest rates, if “maintained for a sufficiently long period”, will help bring inflation to target.
- The Bank of England, the Swiss National Bank and the US Federal Reserve all kept interest rates on hold in September.
Headquarters of the European Central Bank.
Daniel Roland | AFP | Getty Images
The European Central Bank ended a series of interest rate hikes on Thursday despite fresh upside risks to inflation from oil markets amid the Israel-Hamas war.
The key interest rate is expected to be maintained at a record high of 4%, with 10 consecutive interest rate hikes starting in July 2022 bringing interest rates back into positive territory for the first time since 2011.
The Governing Council said recent information confirmed the medium-term outlook for inflation at 2.1%.
He said, “The inflation rate is expected to remain too high for a long time, and upward pressure on domestic prices remains strong.At the same time, the inflation rate fell markedly in September due to a strong base effect, and the underlying inflation rate is expected to subside.” “Most indicators continue to ease,” he said. said in a statement.
Markets had priced in a more than 98% probability that interest rates would be left unchanged after the ECB gave strong indications at its last board meeting that interest rates had peaked.
As of 1:40pm London time, the euro was 0.15% weaker against the British pound, having fallen slightly after the announcement. European currencies fell 0.2% against the US dollar.
September’s move was described as a dovish rise, as the ECB said interest rates had reached a level that would make a substantial contribution to the fight against inflation if “maintained for a sufficiently long period”.
The government reiterated that message on Thursday, saying decision-making still relies on data.
The ECB’s decision is in line with the world’s major central banks, which are widely believed to have already reached or are on the verge of peak interest rates. The Bank of England, the Swiss National Bank and the US Federal Reserve all chose to hold the meeting in September.
In interviews, ECB officials aimed to dampen market expectations for interest rate cuts to begin in the middle of next year, emphasizing the message that interest rates will “remain high for a long time,” while warning that an inflationary shock could spur the ECB to raise rates again. He claimed that it was possible.
The central bank needs monetary policy to remain tight enough to achieve its current inflation outlook of 5.6% this year, 3.2% next year and 2.1% in the “medium term”.
However, the ECB also needs to take into account lukewarm eurozone growth forecasts of 0.7% in 2023 and 1% in 2024, as business activity continues to slump and former EU power Germany stagnates. be.
The bank is also assessing volatility in the bond market, where yields have soared reflecting the global stock market decline.
Marcus Brooks, chief investment officer at Quilter Investors, said inflation risks remain, including rising wages and rising energy prices due to uncertainty in the Middle East.
“Going forward, like other central banks, the market should expect interest rate increases to continue for an extended period of time, leaving the door open if inflation spikes again,” Brooks said in an emailed memo. Probably.”
“However, given the economic stagnation and the fact that other central banks are moving into a hold pattern, something very unexpected would have to happen for them to resume raising rates. Given that, pressure will soon shift to lower rates.”