The European Central Bank held borrowing costs steady on Thursday, ending an unprecedented streak of 10 consecutive interest-rate hikes since July 2022 as the eurozone faces growth headwinds and persistent inflationary pressures.
The ECB followed the lead of the Federal Reserve, which paused its campaign of rate-hikes last month and is expected to keep monetary policy unchanged next week. The backdrop in the U.S. is starkly different, however, with lower inflation and stronger economic growth. The U.S. economy grew at a red-hot pace in the third quarter, according to Thursday’s preliminary print of gross domestic product.
The ECB’s pause, on the other hand, comes after a spate of economic data that showed a weakening eurozone and underscored the central bank’s challenge in bringing inflation back to the 2% medium-term target without causing recession. While the latest reading of annual price-growth was 4.3%, down from last year’s peak above 10%, the ECB has said it sees inflation remaining above 3% through next year.
“Inflation is still expected to stay too high for too long,” ECB President Christine Lagarde said at a press conference in Athens, Greece, on Thursday, where the central bank held its annual meeting away from the Frankfurt headquarters.
Nevertheless, investors have reason to hope that rates are at their peak in Europe, with Lagarde saying that borrowing costs are at levels that, if held for a sufficiently long duration, will make a substantial contribution to returning inflation to target. But the ECB president would not go so far as to discuss the prospect of the central bank cutting rates. That topic was in the spotlight after Greek central bank governor Yannis Stournaras told the Financial Times in an interview this week that the ECB could start considering easing monetary policy by the middle of next year.
“At this point of our fight against inflation, and after 10 successive hikes, now is not the time for forward guidance,” Lagarde said. “Now is the time to stick to our data-dependency.”
While Lagarde and Co. may keep mum on forward guidance, analysts suggest that a slowdown in the eurozone—and especially in Germany, the region’s largest economy—could prompt the easing of financial conditions sooner rather than later. “The risks to economic growth remain tilted to the downside,” Lagarde said, dovetailing with data this week showing regional business activity at its lowest since November 2020, with Germany a weak spot.
“With a rapidly deteriorating macroeconomic landscape, as shown by October PMIs, in our view the ECB will have to tread very carefully going into 2024 and will have no choice but to lower interest rates,” said Julien Lafargue, the chief market strategist at Barclays Private Bank.
Markets, for their part, seemed to take the ECB’s move in stride, with the pan-European Stoxx 600 index paring losses after the decision. While it was expected that the central bank would pause on rates, analysts had speculated that Lagarde would lead on tough language over where the ECB goes next.
Write to Jack Denton at [email protected] and Brian Swint at [email protected]
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