Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The European Central Bank has kept interest rates unchanged, bringing an end to its unprecedented streak of 10 consecutive increases in borrowing costs amid rising concerns over eurozone growth.
The decision, announced after ECB rate-setters’ meeting in Athens, was expected by analysts after eurozone inflation more than halved from its peak and the economy showed signs of weakening.
The benchmark deposit rate is now 4 per cent — four-and-a-half percentage points above its all-time low of minus 0.5 per cent.
The ECB’s pause comes ahead of decisions by the US Federal Reserve and the Bank of England next week in which they are also expected to hold their rates steady as inflation eases.
However they must still decide how long to keep rates elevated to get price pressures down to their 2 per cent target.
In the eurozone, concerns over inflation are coming up against mounting worries about the weakness of the economy. Analysts expect GDP figures for the third quarter, out next week, to show a contraction in output.
ECB president Christine Lagarde said on Thursday growth was “likely to remain weak over the remainder of the year” as the impact of higher interest rates was “broadening”.
Eurozone inflation has dropped from a peak of 10.6 per cent a year ago to 4.3 per cent in September. Some economists think it could fall close to 3 per cent when October price data is published on Tuesday.
However, Lagarde said inflation was still expected to stay “too high for too long”. The conflict between Israel and Hamas could also lead to higher energy prices, she added.
Oil prices remain slightly below where they were at the last ECB meeting six weeks ago, despite fears the war could spread through the Middle East. However, European natural gas prices have climbed by about a third in that time amid worries over supply disruptions.
The ECB said keeping rates at their current level “for a sufficiently long duration” would make “a substantial contribution” to achieving its inflation target. It added that “rates will be set at sufficiently restrictive levels for as long as necessary”.
Economists believe rates are unlikely to rise further due to weak growth, with many warning of a potential recession after this week’s survey of purchasing managers and data on bank lending pointed to a sharper contraction than anticipated.
“The bar for resumed hiking appears relatively high,” said Paul Hollingsworth, chief economist for Europe at French bank BNP Paribas, adding that growth and inflation in the eurozone were “on track to be in line with, if not weaker than” the ECB’s own projections.
But ECB policymakers have not ruled out further rate increases.
“The fact we are holding doesn’t mean to say we will never hike again,” said Lagarde, adding it was “totally premature” to discuss when it might start cutting borrowing costs.
The ECB expects no growth in the third quarter, with inflation averaging 5 per cent.
Lagarde said there were now signs the previously strong labour market was “weakening”, although she still expected a pick-up in growth “over the coming years”.
Financial markets largely brushed off the pause, with stock markets stuck in negative territory and government bond yields stable.
The region-wide Stoxx Europe 600 remained 0.8 per cent lower in early afternoon trade, with France’s Cac 40 and Germany’s Dax stuck 0.7 per cent and 1.3 per cent lower on the day.
The yield on 10-year German Bunds fell 0.01 percentage points to 2.87 per cent, while the yield on Italy’s 10-year bond was down 0.02 percentage points at 4.89 per cent. The euro barely budged against the dollar, down 0.3 per cent.
The ECB had been expected to begin discussions on bringing forward the end of reinvestments in its €1.7tn portfolio of pandemic-era bond purchases and to reduce the amount of interest it pays to commercial banks on their deposits. But Lagarde said neither subject had been discussed at this week’s meeting.
Additional reporting by George Steer
Read the full article here
