The European Central Bank (ECB) on Thursday lifted key interest rates by another 25 basis points and signaled that it is nearing the end of the rate hiking cycle.
The central bank has reiterated with conviction that it is going all out to defend its credibility by bringing down inflation to its target level of two percent in a timely manner.
While repeating a statement that the interest rates will make substantial contribution to the target, ECB President Christine Lagarde shunned clarifying whether the hiking cycle has come to an end.
INTEREST RATES AT RECORD HIGH
After Thursday’s hike, the three key ECB interest rates — the interest rate on the main refinancing operations, and the interest rates on the marginal lending facility and the deposit facility — will be increased to 4.5 percent, 4.75 percent and 4 percent respectively.
Since July 2022, the ECB has lifted interest rates by ten times, pushing rates up by a total of 450 bps. The interest rates on the deposit facility and main refinancing operations have both hit new record highs.
This rate hiking cycle has been the most aggressive one in the history of the ECB both in terms of the duration and aggregated magnitude.
INFLATION HARD TO TAME
The ECB’s concern about the sticky inflation is palpable in its statement: “Inflation continues to decline but is still expected to remain too high for too long.”
The latest edition of the ECB staff macroeconomic projections has added to the central bank’s worries about inflation.
Based on assessment of the latest data, the ECB staff have decided that the average inflation in the euro area will hover around 5.6 percent in 2023, 3.2 percent in 2024 and 2.1 percent in 2025, as opposed to the June projections of 5.4 percent in 2023, 3 percent in 2024 and 2.2 percent in 2025.
Inflation in the euro area in August was 5.3 percent, flat with July. The tendency of inflation “was interrupted because energy prices rose compared with July.”
The fact that “most measures of longer-term inflation expectations currently stand at around two percent” provided little relief for the ECB that claims to keep a close watch on incoming data.
ECONOMY TAKES A BLOW
The rate hikes by the ECB have exacerbated economic woes some euro area countries are facing.
The German economy, the biggest in the euro area, is projected to contract in 2023.
“For Germany, this increase is painful given the contraction of the country’s economy. However, the ECB makes monetary policy not just for Germany but for the euro area as a whole,” said Clemens Fuest, president of the Munich-based economic think tank Ifo.
There is no denying from the ECB about the euro area economy being stagnant in the first half of 2023.
The ECB staff forecast that the euro area’s economy will expand by 0.7 percent in 2023 and 1 percent in 2024, down from 0.9 percent in 2023 and 1.5 percent in 2024 in the June projections.
LAST RATE HIKE?
“Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, if maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” the ECB said in a statement.
In the press conference following the governing council meeting, Lagarde fell short of confirming that the hiking cycle has come to an end when replying to questions from the press.
Insisting that interest rates remain the main tool for the central bank to fight inflation, the ECB chief was apparently reluctant to explicitly close the door on rate hikes. Neither did she clarify on the term of “sufficiently long duration”.
Carsten Brzeski, global head of Marco division of ING Research, argued that the ECB would not bluntly rule out further rate hikes because inflation “has simply taken too many unexpected turns” and “the ECB has been wrong too often in the past.”
According to Brzeski, it is a “highly unlikely” scenario of the ECB “picking up hiking at a future stage.”
“Even if the door to future rate hikes remains open, today’s rate hike will soon be remembered as the final hike of the ECB’s most aggressive rate hike cycle in history,” he added.