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The European Central Bank (ECB) raised interest rates by a quarter-point to 4%, marking its 10th consecutive increase, aimed at tackling stubborn inflation. However, the ECB indicated that this might be the end of its tightening policy. This rate hike brings the deposit rate to an all-time high. Economists and markets now anticipate a prolonged pause and potential rate cuts in the latter half of the next year.
Initially, market expectations leaned toward unchanged rates, but they shifted after a source suggested that the ECB would raise its 2024 inflation forecast. The ECB stated that it believes the current interest rates will contribute significantly to bringing inflation back to its target over time.
The ECB faces conflicting pressures as inflation remains above 5%, driven by a tight labor market and high energy costs, while economic growth prospects are diminishing due to higher interest rates. Even the service sector, previously a strong point, is weakening, raising concerns of a potential recession accompanied by high inflation, known as stagflation.
The ECB's new economic projections show a 3.2% inflation rate next year (up from 3.0% previously) and reduced growth forecasts of 0.7% for this year and 1.0% for 2024. The ECB remains committed to returning inflation to its 2% medium-term target.
Overall, the debate within the Governing Council centered on whether the ECB's recent actions were enough to bring inflation down to the target by 2025.
[Information from Reuters]
