ECB Poised for Pause: European Central Bank Expected to Halt Interest Rate Hikes Amid Economic Uncertainties

ECB President Christine Lagarde has acknowledged the 'pain' felt by households as a result of aggressive rate hikes, but has cautioned against relenting too soon

In a significant shift, European Central Bank (ECB) policymakers are anticipated to break from their trend of raising interest rates when they convene in Athens on Thursday, marking the first deviation in over a year.

The once-sizzling inflation, fueled by Russia’s invasion of Ukraine in early 2022, has started to ease, coupled with a dimming economic outlook. Consumer prices in the 20-nation currency bloc rose at an annual rate of 4.3 percent in September, the lowest in almost two years. While still above the ECB’s two-percent target, the toll of rising interest rates has reverberated across the bloc.

The outbreak of the Israel-Gaza war has introduced additional challenges for the eurozone economy, already grappling with the repercussions of the conflict in Ukraine. As global uncertainties mount, the ECB appears poised to emulate the US Federal Reserve and temporarily pause interest rate hikes.

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Jack Allen-Reynolds of Capital Economics suggests that all signs point to the ECB’s current tightening cycle being “over” after the September meeting. With the ECB’s key deposit rate currently at four percent, its highest historical mark, the bank is likely to refrain from swift further actions.

The complexities introduced by the Middle East conflict and rising oil prices have put the ECB in a more “complicated” position, says ING bank analyst Carsten Brzeski. He notes that this moment presents an opportune time for the ECB to take a pause.

The criticism of the ECB’s rate increases, particularly from certain eurozone governments, has added to the complexity. Some member countries, such as Italy and Portugal, have found the rate hikes challenging, and enthusiasm for further increases has waned among the governing council.

French central bank governor Francois Villeroy de Galhau suggests that the slowing eurozone inflation indicates that the “current benchmark rates are appropriate.” Meanwhile, ECB President Christine Lagarde acknowledges the “pain” felt by households due to aggressive rate hikes but cautions against relenting too soon.

The focus is likely to be on maintaining tight monetary policy for an “extended period,” according to Allen-Reynolds. Luis de Guindos, another ECB board member, emphasizes that taming inflation will take time, projecting that inflation will remain too high for an extended duration.

With the ECB projecting that inflation will not return to the two-percent target before 2025, the governing council may revisit the question of rate hikes in December when new forecasts are available. Economic indicators have been on a downward trend, with Germany slipping further into recession.

The ECB’s decision to hold rates this week could be presented as a temporary “pause,” yet it may evolve into a more prolonged plateau, says Allen-Reynolds. While interest rate cuts remain distant, the ECB aims to sound determined while leaving the door open for potential future adjustments.

Source: AFP

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Written by George Addo

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