The European Central Bank decided to leave interest rates unchanged. This is the first break after a series of ten consecutive increases. The interest rate on the main refinancing remained unchanged at 4.50%, on deposits at 4%, and on marginal loans at 4.75%. The Central Institute announced this at the conclusion of the meeting held in Athens. The decision was taken unanimously.
The interest rate level is consistent with the target…
The ECB reiterated that interest rates are “at levels that, if maintained for a sufficiently long period, will make an important contribution” to achieving the 2% target in the medium term. Chief Economist – and member of the Board of Directors – Philip Lane explained, during the September meeting, that the macroeconomic models used by the monetary authority indicate a level of 3.75%-4% for the deposit interest rate, which is consistent with achieving the goal in the time horizon represented by monetary policy, basically. 2025.
…But further increases cannot be ruled out
At this point, for the ECB, it is a matter of checking whether the inflation trend predicted by the models is confirmed by reality. Therefore, future decisions remain linked to reading the incoming data, according to the “meeting after another” approach followed so far, which leaves the door open to making decisions in any direction. At the press conference, President Christine Lagarde did not want to stress that the current level of interest rates was the “peak” of tightening, nor did she want to specify how long interest rates would be “long enough,” nor. However, he explained that the idea of lowering the cost of credit was “completely premature” and the hypothesis was not discussed.
Inflation decreases due to statistical effects
Hence nothing is guaranteed yet in the price slowdown. The press release explains that the ECB believes that the recent decline in overall inflation and “core” inflation – core inflation – is linked to “strong fundamental effects”, which are purely statistical: prices, not just energy prices, have already reached high levels a year ago and the comparison Click on the growth rate. Lagarde explained that inflation will continue to decline over the coming months, but for the same reason, almost “mathematically.”
Price pressures remain strong
However, domestic pressures on prices remain “strong”. The labor market is strong, although showing some initial signs of weakness. In any case, the ECB still expects inflation to remain “at very high levels for a very long time.” On the other hand, increases in interest rates decided in the past are “strongly transmitted” to financing conditions, “increasingly slowing down demand and thus contributing to the reduction of inflation.” Lagarde explained that risks to growth remain directed to the downside, even if labor market flexibility is able to support household and business confidence.
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