2023-07-27 21:48:36
A year following kicking off the fastest rate hike cycle in history, by 4.25 percentage points to date, the euro keepers have stayed the course. (Photo: 123RF)
Frankfurt — The European Central Bank (ECB) on Thursday raised its benchmark interest rate to its highest level since May 2001, but opened the door to a possible pause in the coming months, as the effect of tightening currency weighs on the economy.
A year following kicking off the fastest rate hike cycle in history, by 4.25 percentage points to date, the euro keepers have stayed the course.
The 0.25 percentage point rate increase decided on Thursday, as in June, brings the bank liquidity deposit rate to the ECB, which refers, to 3.75%, the highest since the spring of 2001.
“Inflation continues to slow” in 2023, but “should still remain too high for too long a period”, justified the ECB in a press release detailing its decisions.
Russia
She judged that Russia’s suspension of the agreement on Ukrainian grain exports via the Black Sea might contribute to accelerating the rise in prices.
At the same time, the monetary institute marked a significant inflection.
After nine successive interest rate hikes, he hinted that he might take a break at the next meeting.
“We have an open attitude regarding the decisions that will be taken in September and at the following meetings,” which will depend on the economic data available, ECB President Christine Lagarde told a press conference in Frankfurt.
“We are moving into a period where we will be dependent on economic data”, she added, and it is they who will decide “if we raise (rates) or if we take a break”, explained Christine Lagarde.
“It might be an increase, or a break,” she added, “it will depend on the meetings.”
She assured that the Board of Governors in any case would not lower its rates in future meetings.
In the euro zone, inflation is certainly down, at 5.5% over one year in June, but above all thanks to the decline in energy prices, and by remaining well above the 2% target set by the ECB.
Critiques
The open door to a break comes as previous increases are starting to slow price increases and weigh on economic activity.
Christine Lagarde judged that the economic outlook for the euro zone had “deteriorated”.
The policy of high rates is “risky” and might “prolong the phase of economic weakness in Europe and in Germany that we are currently experiencing,” the president of the Berlin institute DIW Marcel Fratzscher told a German media group on Thursday.
The Governor of the Bank of the Netherlands, Klaas Knot, recently indicated that a further rate hike at the start of the school year is “at best a possibility, but certainly not a certainty”.
In September the institute will have new economic projections and will have taken note of the evolution of inflation until August.
In the United States, the Federal Reserve showed the way on Wednesday by deciding on a further increase in its key rate, by a quarter point to 5.5%, the eleventh since March 2022. The rate is at its highest since 2001.
In the euro zone, the effects of the cumulative rise in rates are already perceptible: demand for credit, particularly from companies, reached its lowest level in 20 years during the second quarter, the ECB indicated on Tuesday.
The euro zone fell into a slight recession last winter, but the latest forecasts from the International Monetary Fund see the region’s GDP (gross domestic product) growing by 0.9% (+0.1 point) in 2023, despite a decline in Germany (-0.3%), the only G7 country that should see the recession continue.
Monetary tightening is criticized by some governments.
This policy might create “a more difficult situation for growth at European level”, said Portugal’s Finance Minister Fernando Medina in mid-July.
Italian head of government Giorgia Meloni criticized the “simplistic recipe” of raising interest rates to fight inflation at the end of June, fearing that “the cure will prove more damaging than the disease”.
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