The European Central Bank (ECB) is leaving interest rates in the euro area unchanged for the second time in a row. The key interest rate at which banks can obtain fresh money from the central bank remains at 4.5 percent following a decision by the ECB Council, as the monetary authorities announced on Thursday in Frankfurt. Inflation in the common currency area has recently weakened surprisingly significantly. At the same time, concerns about the economy are growing.
According to the most recent decision by the Governing Council of the ECB, the deposit interest rate that banks receive for parked funds remains at 4.0 percent. This is the highest level since the monetary union was founded in 1999.
The US Federal Reserve (Fed) had previously left the key interest rate in the USA unchanged for the third time in a row and promised interest rate cuts in the coming year.
Also read: IMF advises against rapid interest rate cuts in Europe
Many economists expect that the euro’s monetary authorities will also lower interest rates next year. However, ECB President Christine Lagarde recently warned against declaring victory over inflation. Rather, it is still necessary to remain vigilant until the inflation rate returns to the medium-term target of two percent. Deutsche Bundesbank President Joachim Nagel warned: “It would be premature to reduce key interest rates soon or to speculate about such steps.”
Inflation in the euro area weakened significantly in November. According to the statistics office Eurostat, consumer prices were 2.4 percent above the level of the same month last year, after 2.9 percent in October. Last year, the inflation rate was at times in the double digits as a result of Russia’s war of aggression against Ukraine. In the medium term, the ECB is aiming for stable prices with an inflation rate of 2.0 percent for the common currency area with its 20 member states.
After an unprecedented series of ten interest rate increases in a row in the fight against high inflation, the monetary authorities stopped tightening interest rates for the first time in October. Higher interest rates make loans more expensive, which can slow down demand and counteract high inflation rates. More expensive loans are also a burden for the economy because loan-financed investments become more expensive.
The economy in the euro area is weakening. According to Eurostat, economic output shrank by 0.1 percent in the third quarter compared to the previous quarter. In the second quarter, gross domestic product (GDP) grew by 0.2 percent after stagnation at the beginning of the year. According to estimates by the federal government and economists, the German economy will continue to shrink slightly in 2023 as a whole.
