The European Central Bank (ECB) has decided to halt its streak of interest rate increases across the eurozone, marking a significant shift in monetary policy. The ECB’s decision to leave borrowing costs untouched comes after 10 consecutive interest rate hikes, and it has major implications for the region’s economy.
As of this announcement, the central bank’s main refinancing rate remains at 4.5%, with the marginal lending facility staying at 4.75% and the deposit rate at 4%. This move was largely expected, but it carries significant implications for the eurozone’s economic landscape.
The primary driver behind the ECB’s decision is the recent drop in inflation, which “dropped markedly in September.” Additionally, most measures of underlying inflation have continued to ease. The central bank noted that its monetary tightening program, initiated last year, is still having a forceful impact on financing conditions. This has effectively dampened demand and played a role in pushing inflation down.
In September 2023, consumer prices in the 20 eurozone countries increased by 4.3%, down from the 5.2% rate observed a month earlier. This marks the lowest rate of growth in the trading bloc since October 2021. The ECB, like other central banks worldwide, is mandated to maintain inflation at 2% over the medium to long term. The decision to pause the rate hikes is a response to the changing inflation landscape.
Both the Bank of England and the US Federal Reserve are expected to make their own interest rate decisions in the upcoming week. In their most recent meetings, both central banks opted to keep borrowing costs unchanged, and market expectations suggest this trend will continue in their upcoming announcements.
The ECB’s decision to maintain rates at current levels has already had an impact, encouraging mortgage lenders in the UK to reduce their rates. This move has injected competition into the market, benefiting borrowers. The Fed will announce its decision on November 1, with the Bank of England following a day later.
There are various risks that could keep inflation relatively high, including increasing wage growth and uncertainties in the Middle East, leading to higher energy prices. Going forward, like other central banks, the ECB is likely to indicate that the market should expect higher interest rates for an extended period, keeping the possibility of rate hikes open in case of an inflation resurgence.