On Thursday, the European Central Bank (ECB) announced its decision to keep its key interest rate at a record high, emphasizing a commitment to maintaining this level for as long as necessary to address inflation concerns. This stance suggests that rate cuts are not imminent, despite expectations that the ECB might take action next year to support the contracting economy.
This move aligns with similar decisions made earlier in the week by the U.S. Federal Reserve, Bank of England, and Swiss National Bank, all opting to leave interest rates unchanged. In contrast, the U.S. Federal Reserve signaled a potential three interest rate cuts in the coming year.
Following the ECB’s decision to keep its benchmark rate at 4%, President Christine Lagarde, who spoke hoarsely and mentioned her recovery from COVID-19, stressed the need to remain vigilant against potential economic challenges. Lagarde dismissed discussions of rate cuts, emphasizing that future decisions would ensure interest rates are set at levels deemed sufficiently restrictive for as long as required.
Central banks globally had aggressively raised rates to curb inflation stemming from the COVID-19 pandemic and Russia’s invasion of Ukraine. Now, the challenge is to balance the need for prolonged high rates to contain inflation with the risk of higher borrowing costs triggering economic recessions.
While inflation has fallen more than anticipated in the eurozone, dropping to 2.4% in November from a peak of 10.6% in October 2022, economic growth has lagged due to the surge in borrowing costs. The eurozone experienced a 0.1% contraction in economic output in the July-to-September quarter.
Analysts predict the ECB might cut rates next year, with varying forecasts ranging from March to September for the potential move. Despite the decline in inflation after a series of rate hikes, economic challenges persist, with increased costs for housing and business investments affecting growth. European consumers, grappling with rising prices and stagnant wages, are approaching Christmas shopping with caution, awaiting post-holiday sales for affordability.
The ECB’s decision reflects its ongoing efforts to curb inflation, with analysts noting that there is still a considerable distance before the bank considers rate cuts. While some anticipate the first cuts in June, others suggest a potential quarter-percentage-point cut in April, followed by additional cuts, considering inflation could be lower than the ECB’s expectations. Higher interest rates, a tool used to combat inflation, increase the cost of borrowing across various sectors, impacting demand and ultimately easing prices.
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