Given the lower inflation figures, the euro watchdogs have not increased interest rates further after ten interest rate increases in a row. The Council of the European Central Bank left the policy interest rate at 4.5 percent, as the ECB announced after a council meeting in Athens. The ECB will continue to make decisions based on the available data, President Christine Lagarde said. However, a discussion about interest rate cuts is “completely premature”. Concerns about the economy have increased recently.
Higher interest rates make loans more expensive, which can slow demand and counteract high inflation. More expensive loans also burden the economy, as loan-financed investments become more expensive. According to the central bank’s latest decision, the deposit interest rate that banks receive for parked funds remains at 4.0 percent. This is the highest level since the establishment of Monetary Union in 1999.
“Inflation will continue to fall”
According to Commerzbank chief economist Jörg Krämer, the European Central Bank (ECB) is unlikely to raise interest rates further in the coming months. Thomas Gitzel, chief economist at VP Bank, also expects no increase this year. “Inflation will continue to decline in the coming months.” Moreover, economic development remains difficult.
“Interest rate increases act like a long-term medicine with significant delays,” explains Friedrich Heinemann, economist at the German economic research institute ZEW. The ECB aims for stable prices in the medium term with an inflation rate of 2.0 percent. “Based on its current assessment, the Governing Council is of the opinion that the key ECB interest rates are at a level that, if maintained for a sufficient period, will contribute significantly to this objective,” the ECB said.
War in Ukraine as a driver of inflation
In September, inflation in the single currency area weakened significantly, with annual inflation falling to 4.3 percent from 5.2 percent in August. Last year inflation sometimes reached double digits as a result of Russia’s war of aggression against Ukraine.
Since July 2022, the ECB has been countering this development with an unprecedented series of interest rate increases. Heiner Herkenhoff, general manager of the banking association BdB, warned that the ECB should keep the door open to interest rate increases.
Concerns about the economy persist
Concerns about the economy have increased recently. “The eurozone economy remains weak,” Lagarde said. The ECB recently expected a 0.7 percent increase in gross domestic product (GDP) this year. An increase of 0.9 percent was predicted in July. According to estimates by the federal government and many economists, Europe’s largest economy, Germany, will even shrink slightly this year.
Source: Krone
I’m Ben Stock, a journalist and author at Today Times Live. I specialize in economic news and have been working in the news industry for over five years. My experience spans from local journalism to international business reporting. In my career I’ve had the opportunity to interview some of the world’s leading economists and financial experts, giving me an insight into global trends that is unique among journalists.
