In a move that has been widely anticipated, the European Central Bank (ECB) has raised interest rates by 25 basis points, despite concerns over a slowing European economy. This brings the deposit facility rate to its highest level since 2001. Current market predictions place the likelihood of further ECB rate hikes at 30%.
On September 14, the ECB announced its latest interest rate decision, raising the main refinancing rate, deposit facility rate, and marginal lending rate by 25 basis points each, exceeding market expectations. Earlier in September, the probability of a 25 basis point hike by the ECB was estimated at only 20%, but this figure had risen to 68% by the time of the announcement.
Following this increase, the deposit facility rate now stands at 4%, the highest in 22 years. The refinancing rate has reached 4.50%, and the marginal lending rate is at 4.75%. Since ending its eight-year era of negative interest rates last July, the ECB has raised rates ten times in succession, with a cumulative increase of 450 basis points, marking its fastest tightening pace in history.
In its rate statement, the ECB's Governing Council indicated that based on current assessments, the key ECB interest rates have reached levels that can be maintained over an extended period. The data will determine the degree and duration of policy restrictiveness. As long as necessary, rates will remain sufficiently restrictive, and past rate hikes are still having a significant impact.
Analysts generally believe that the ECB's move implies further constraints on economic activity in the Eurozone, potentially exacerbating the region's economic challenges.
Given the general weakness in the Eurozone economy, the ECB has revised down its GDP growth forecasts: 0.7% for 2023 (previously 0.9%), 1% for 2024 (previously 1.5%), and 1.5% for 2025 (previously 1.6%).
At the same time, the ECB has revised its inflation forecasts upwards: 3.2% for 2024 (previously 3.0%) and 2.1% for 2025 (previously 2.2%), emphasizing its commitment to returning inflation to the 2% target.
The euro briefly rose against the U.S. dollar by about 20 points following the announcement but quickly fell by over 40 points, currently trading at 1.0680.
Lagarde's Take on Inflation and Growth
ECB President Christine Lagarde emphasized during a press conference that inflation has remained too high for too long. She stressed the goal of returning inflation to the 2% target and indicated that interest rates have not yet peaked.
Lagarde noted that while most underlying inflation indicators are starting to decline, rising energy and food costs might pose upward risks to inflation. By 2025, the ECB's overall inflation rate is not expected to return to the 2% target.
Lagarde emphasized that economic growth is expected to remain subdued, with the third quarter also showing weakness. As the impact of tightening policies on domestic demand becomes more pronounced and the international trade environment becomes increasingly sluggish, the ECB has significantly lowered its economic growth forecasts.
Is This the ECB's Final Rate Hike?
The key question now is: What's next for the ECB? Although Lagarde mentioned that "interest rates have not yet peaked," many analysts believe that the signals from the ECB suggest this might be the last hike in the current cycle. This sentiment caused the euro to drop to a weekly low after its initial surge.
Mike Bell, a strategist based in London for J.P. Morgan Asset Management, believes that with business surveys indicating a significant slowdown in economic growth, the ECB might not hike rates again.
However, Mark Wall, Chief European Economist at Deutsche Bank Research, stated that the ECB hasn't declared victory on the inflation front. While the bank has signaled a pause in its lengthy rate-hiking cycle, it's merely a "pause due to lack of confidence." If necessary, the ECB might further raise rates in the future.
