Rosalind Evans
The European Central Bank (ECB) has decided to hold interest rates steady at 4% after ten consecutive hikes in July 2022, bringing rates back into positive territory for the first time since 2011. This decision comes amidst new upside risks to inflation from oil markets due to the ongoing war between Israel and Hamas. The ECB’s Governing Council has confirmed its medium-term outlook for inflation at 2.1%, stating that “inflation is still expected to stay too high for too long, and domestic price pressures remain strong” while acknowledging that inflation dropped markedly in September.
One key aspect of this decision is the message from the ECB that rates have reached levels that will substantially contribute to the fight against inflation. ECB President Christine Lagarde emphasized the need for data-dependent decision-making, stating, “At this point of our fight against inflation and after ten successive hikes, now is not the time for forward guidance.” She added that the topic of rate cuts was “totally, totally premature.” The ECB is taking a ‘higher for longer’ approach to interest rates, with the possibility of further hikes if an inflationary shock occurs.
The ECB’s decision aligns with other major central banks worldwide, such as the Bank of England, Swiss National Bank, and U.S. Federal Reserve, all of which opted to hold rates in September. The central bank is balancing the need for tight monetary policy to meet its inflation forecasts with the challenges posed by weak business activity and slow eurozone growth forecasts. Christine Lagarde also confirmed that the ECB is closely monitoring volatility in the bond market, where yields have risen sharply.
The European Central Bank’s decision to hold interest rates steady reflects a cautious approach in the face of inflationary pressures and geopolitical tensions. The bank prioritizes the fight against inflation while considering the need for economic growth. The ‘higher for longer’ approach to interest rates signifies a commitment to stability, with the possibility of further action if new risks emerge.
