“ECB Raises Interest Rates as Eurozone Inflation Remains High – Latest Updates and Analysis”

2023-05-04 12:56:15

The European Central Bank says inflation is “too high for too long” in the eurozone.

The European Central Bank raised its interest rates once more on Thursday, but at a slower pace, taking into account both the timid decline in inflation, excluding energy prices, and weak economic growth in the euro area. euro.

The main policy rates were raised by 0.25 percentage point, as expected by most analysts following a series of strong increases since July 2022.

“Inflation continues to be too high for too long”justified the institution in a press release.

ECB interest rates are now in a range between 3.25 and 4%, the highest since October 2008.

The guardians of the euro did not disclose in their press release whether this is the end of the unprecedented cycle of monetary tightening aimed at controlling soaring consumer prices.

This more moderate rise seems to signal that the ECB is “entered the final phase of its current tightening cycle”estimates Carsten Brzeski, of the ING bank.

The ECB imitates the Fed

By making credit more expensive, the ECB wants to curb demand for mortgage loans, for consumption or for business investments and thus slow down the rise in prices.

The American Central Bank, which started its monetary tightening earlier than its European counterpart, has not yet formally announced a pause but has also moderated the pace of monetary tightening.

The Fed raised its main key rate on Wednesday for the tenth time in a row since March 2022, by a quarter of a percentage point, leaving the rest of its policy open.

The 26 members of the Governing Council of the ECB had a panoply of fresh data to make their decision.

Inflation in April still sailed well above the 2% target, regaining 0.1 percentage point, to 7.0%, following months of slowdown.

But excluding energy, food, tobacco and alcohol prices, “core” inflation fell for the first time in a year, to 5.6% from 5.7% in March, according to Eurostat.

A significant slowdown in inflation is not expected in the short term, given the wage increases granted in several sectors, such as in Germany for public service employees.

Balance sheet reduction

In the banking sector, lending conditions are getting tougher than ever since the 2011 sovereign debt crisis and demand for credit is feeling the pinch, according to the latest ECB data.

Monetary tightening is thus gradually taking effect: “all these impacts will continue to spread through the economy gradually, it’s not over”predicted at the end of April the chief economist of the ECB Philip Lane.

The weak growth of the Gross Domestic Product in the euro zone, of 0.1% in the first quarter, attests to the slowdown desired by the ECB, but also to the vulnerability of the economy of the euro zone.

Economists expect the deposit rate to peak between 3.50% and 3.75% by the summer low.

“Once this plateau is reached, rates should stabilize for a relatively long period.”believes Maxime Mura, manager at Swiss Life Asset Managers.

Another project is underway at the ECB, with the reduction of the stock of public and private bonds acquired during years of low inflation.

This reduction will accelerate, indicated the ECB in its press release: the Governing Council “plans to end reinvestments under the asset purchase program (APP) from July 2023”.

This would bring the monthly rate of decline in the balance sheet to regarding 25 billion euros, once morest 15 billion since March and until the end of June, by virtue of partial reinvestments of securities at maturity. This measure aims to tighten rates over the long term and thus contributes to the fight once morest inflation.

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