European Central Bank paused the most aggressive cycle of rate increases since the introduction of the Euro amid rising fears over the economy of the eurozone.
The ECB made a widely anticipated decision on the financial markets by leaving its key policy rate unchanged for the first year. This was after a series of 10 increases in borrowing costs. It concluded that it had done more than enough to combat the rising cost-of-living.
The impact of rising rates on the European economy is becoming more apparent. There are warnings about a possible recession in the area of single currency . This was triggered by a decline in Germany where a manufacturing slump caused business activity to contract for the fourth consecutive month in October.
Christine Lagarde said that the economy will likely remain weak throughout the rest of the year. “But, as inflation continues to fall, real household incomes improve, and demand for exports from the euro zone increases, the economy will strengthen in the coming years.”
Lagarde, speaking after the Athens decision, warned that a weaker global economy could weigh on the Eurozone. She also mentioned the risks posed by geopolitical tensions in the Israel/Hamas conflict.
She said that this could lead to firms and households feeling less confident about the future and stifle growth.
The key deposit rate for commercial bank deposits is now 4%, the highest level since 1999, when the euro was introduced.
The rate for the main refinancing operation, which provides the majority of the liquidity to the banking sector, was kept at 4.5%. Meanwhile, the rate for the marginal lending facility, which offers overnight credit to banks was also left at 4.75%.
Next week, the US Federal Reserve and Bank of England will likely keep interest rates unchanged at their policy meetings.
Economists predict that borrowing costs in the 20-country group will remain high for a long time, with inflation exceeding the central bank’s goal.
The ECB stated that it is determined to bring inflation back to its 2% target over the medium term. It said its key interest rates are “at levels which, if maintained for a sufficient period of time, will contribute substantially to this goal”.
The ECB’s decision brings it in line with the US Federal Reserve as well as the Bank of England. This comes at a time when the world’s top central banks are taking stock of their actions after the steepest interest rate increase cycle for decades.
The world economy is in a fragile state as oil prices continue to rise, and US growth continues to be more resilient than anticipated. The US economy’s third-quarter growth was stronger than expected, reaching 4.9% annualised.
Lagarde stated that the ECB was ready to take additional action to reduce borrowing costs, as inflation “was expected to remain too high for too much time.” She also said previous rate increases were dampening the demand and would help bring inflation back down over time.
Inflation across the eurozone Siemens Energy plummeted after it requested a bailout by the German government. This was due to a series of technical issues and increased costs at its Wind Turbine arm.
The Bundesbank, Germany’s central bank, announced on Monday that the German economy is likely to shrink in the third quarter 2023.
Germany’s economy shrank by 0.1% during the first quarter of this year. Economists consider two consecutive quarters with declining economic output to be a recession.
Marcus Brookes said that the ECB would not likely raise rates once again. “The focus will shift quickly to lowering rates, given the lackluster economic growth. The central banks are facing this problem now.
The German economy is in a recession, and other economies will have felt as if they were in a recession.