Historical. On Thursday 14 September, the European Central Bank (ECB) raised its reference interest rate to its highest level since 1999, defying those who called for a truce so as not to worsen the slowdown in economic activity in the euro zone.
After this tenth increase in a row since July 2022, the Frankfurt institution has not explicitly announced a pause in its draconian cycle of monetary tightening.
It states in its press release that "the Governing Council considers that the key ECB interest rates have reached levels which, if maintained for a sufficiently long period, will contribute significantly to the return of inflation to the target level as soon as possible."
Does this mean that the peak has been reached? ECB President Christine Lagarde will no doubt be polled on this aspect in the press conference scheduled for 12:45 GMT.
Eco info. © France 24
The ECB has chosen to stay the course, fourteen months after launching the fastest and broadest rate hike cycle in its history, of 4.50 percentage points to date.
A decision she justifies by saying that "if inflation continues to slow, it should always remain too high for too long".
The ECB on Thursday raised its inflation forecasts for the years 2023 and 2024, due to the impact of energy prices.
The monetary institution's new macroeconomic projections forecast a price increase of 5.6% in 2023, then 3.2% in 2024 and 2.1% in 2025, approaching the medium-term objective of 2.0%.
The ECB faced a dilemma on Thursday, making its decision more uncertain than ever, as economic activity in the euro zone shows real signs of contraction.
[IN THE SPOTLIGHT AT 20PM]
The European Central Bank (ECB) has decided to raise interest rates for the first time in more than a decade, surprising with a larger-than-expected rise to fight inflation and despite the Italian political crisis #AFP #AFPGraphics 2/5 pic.twitter.com/NImf8wq6CX
— Agence France-Presse (@afpfr) July 21, 2022
The monetary tightening of recent months has led to a surge in borrowing costs for households and businesses, affecting demand and therefore the distribution of credit.
Once confined to the manufacturing sector, the slowdown has gradually spread to the services sector. The PMI hit a 33-month low, with activity contracting at a pace not seen since the fall of 2020 and the first year of the pandemic.
The ECB on Thursday lowered its growth forecasts in the euro zone until 2025. This is expected to reach only 0.7% in 2023, against 0.9% previously expected, then 1.0% in 2024 and 1.5% in 2025.
Inflation and growth
This dilemma between inflation and growth has given rise to intense debate among eurozone central bankers in recent weeks.
Faced with inflation deemed tenacious, the risk of not doing enough appeared higher than the risk of doing too much, as hammered by the "hawks" who have dominated the debate in the ECB council for more than a year.
The rate increase of 0.25 percentage points decided on Thursday, as in July, brings the deposit rate of bank liquidity at the ECB, which references, at 4.00%, the highest since the creation of the ECB in 1999.
The ECB's aim is to continue to curb economic activity so that companies and businesses refrain from raising prices, and their employees moderate wage demands, which tend to maintain inflation.
"The fear of not fully controlling inflation and the risk of stopping too soon must have been a bigger concern than the growing risk of recession in the euro area," Carsten Brzeski of ING Bank said after the decision.
But he also believes that the ECB announced on Thursday "the final increase" in the monetary tightening cycle.
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