The European Central Bank left its interest rates unchanged for the first time in 15 months, taking a breather as the fastest tightening cycle in its history exerts an increasing drag on the economy.
The decision had been widely expected after ECB President Christine Lagarde signaled a likely pause following last month’s rate hike. Economic activity and inflation have continued to slow since then.
That means the key deposit rate stays at a record-high 4 percent, with the main refinancing and marginal lending rates staying at 4.50 percent and 4.75 percent, respectively.
According to the ECB’s statement, inflation is still expected to stay too high for too long, and domestic price pressures remain strong. But at the same time, inflation dropped markedly in September.
Looking ahead, the central bank left the door for further rate hikes open, saying it “will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.”
However, most analysts think interest rates have now peaked and are already speculating about the timing of a first cut instead. According to a recent Reuters survey, most economists now expect this to happen by the third quarter of next year with the deposit rate falling to 3.5 percent by end-September.
Annual inflation has eased to 4.3 percent in September from a peak of 10.6 percent a year ago, but it remains more than twice the ECB’s 2 percent target. Survey data, meanwhile, suggest that the eurozone economy may have contracted in the third quarter.
“The rapid rate hikes over the past year or so have helped to curb inflation and stabilize inflation expectations, and this trend is expected to continue in the coming months,” Clemens Fuest, president of the Ifo think-tank in Munich, said in a statement. However, he added that it is still too early to cut interest rates, saying that for this to happen, inflation must carry on falling.
“There is no guarantee that this will happen, especially because of high wage agreements and risks in energy prices,” Fuest said.
President Christine Lagarde is due to hold a regular press conference at 2:45 CET in Athens, but will likely shy away from any guidance on further moves that she might be forced to abandon. Tensions in the Middle East have clouded visibility even further in recent weeks, and Lagarde has stressed a need for humility going forward, after the forecasting failures of 2021.
The ECB’s statement offered no hint that it might unload the bonds it bought under its pandemic crisis program any earlier than the end of next year, as previously indicated. In the run-up to the meeting, several policymakers called for an earlier reduction, aligning balance sheet policy more closely with its restrictive stance on interest rates.