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The European Central Bank kept interest rates unchanged, ending an unprecedented series of ten consecutive increases in borrowing costs.
The decision, announced after European Central Bank interest rate setters gathered in Athens for their annual meeting outside the bank’s headquarters in Frankfurt, was expected by analysts after euro zone inflation more than halved from its peak and the economy showed signs of weakness.
The benchmark deposit rate is now 4 per cent – four and a half points above its all-time low of minus 0.5 per cent.
The ECB’s pause follows the Bank of Canada’s decision to keep its key interest rate at 5 percent yesterday, and comes ahead of the expected hold by the US Federal Reserve and the Bank of England next week.
These decisions underscore how major central banks appear to think they are on the cusp of doing enough to tame inflation.
Rate setters must now assess how long interest rates need to stay high to bring inflation back to their 2 percent target.
Meanwhile, concerns are mounting about the weakness of the eurozone economy, with analysts expecting third-quarter GDP figures, to be released next week, to show a contraction in output.
European Central Bank President Christine Lagarde said on Thursday that growth “is likely to remain weak during the remainder of the year” as the impact of higher interest rates widens.
Inflation in the euro zone fell from its peak of 10.6 percent a year ago to 4.3 percent in September. Some economists believe prices could fall by nearly 3 percent when price data for October is published on Tuesday.
However, Lagarde said inflation is still expected to remain “very high for a very long time.”
She added that the conflict between Israel and Hamas could also lead to higher energy prices.
Oil prices remain slightly lower than they were at the last meeting of the European Central Bank six weeks ago, despite concerns that the war could spread across the Middle East. However, European natural gas prices rose by about a third during that period amid concerns about supply disruptions.
The European Central Bank said that keeping interest rates at their current level “for a sufficiently long period will contribute significantly” to achieving the inflation target. He added, “Prices will be set at sufficiently restrictive levels as long as necessary.”
Economists believe interest rates are unlikely to rise further due to weak growth, with many warning of a potential recession after this week’s study of purchasing managers and data on bank lending pointed to a sharper contraction than expected.
“The barrier to resuming interest rate hikes appears to be relatively high,” said Paul Hollingsworth, chief economist for Europe at French bank BNP Paribas, adding that growth and inflation in the euro zone “are on track to be consistent with, if not weaker than” the central bank’s expectations. European. Own expectations.
The European Central Bank expects no growth in the third quarter, with inflation averaging 5 percent.
Lagarde said there are now signs that the hitherto strong labor market is “weakening,” although she still expects growth to pick up “over the coming years.”
Financial markets largely ignored the pause, with equity markets remaining in negative territory and government bond yields stable.
The region-wide Stoxx Europe 600 index remained 0.8 percent lower in early afternoon trading, with France’s Cac 40 and Germany’s DAX down 0.7 percent and 1.3 percent on the day.
The German 10-year bond yield fell 0.01 percentage point to 2.87 percent, while the Italian 10-year bond yield fell 0.02 percentage point to 4.89 percent. The euro barely moved against the dollar, down 0.3 percent.
The ECB was expected to begin discussions on bringing forward the end date for reinvestments in its 1.7 trillion euro portfolio of pandemic-era bond purchases and reducing the amount of interest it pays commercial banks on their deposits, but Lagarde said neither topic had been discussed. It was discussed at this week’s meeting.
Additional reporting by George Steer
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