ECB holds interest rates at 22-year high as Lagarde warns rate cut talk ‘premature’
The European Central Bank (ECB) kept interest rates on hold for the third consecutive meeting while continuing to suggest it was “premature” to discuss cutting interest rates.
The decision means interest rates across the bloc remain at their highest level in 22 years. The eurozone’s key interest rate remains at 4.00 per cent, the main refinancing rate at 4.50 per cent and the marginal lending facility at 4.75 per cent.
In a statement the central bank said that incoming data had been inline with expectations and repeated its message that rates are at a sufficiently high level to bring inflation down to the two per cent target.
“The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary,” the ECB confirmed.
Although markets expected rates to be left on hold, investors were looking out for any signs that interest rates will be lowered in the coming months.
Traders think that the ECB will start lowering rates in the spring, but speaking to reporters after the decision Christine Lagarde, president of the ECB, said rate cuts were not yet on the table.
“The consensus around the table of the Governing Council was that it was premature to discuss rate cuts,” she said.
The ECB’s said it will continue to follow “a data-dependent approach,” reiterating messaging from a number of policymakers over the previous few weeks.
Like central banks all over the world, policymakers at the ECB are treading a delicate balance. Loosening policy too early risks creating a resurgence in inflation while keeping rates too high means the economy could face an unnecessarily deep downturn.
The ECB noted that the “declining trend in underlying inflation has continued” while past rate rises were being “transmitted forcefully”.
Inflation across the bloc ended 2023 at 2.9 per cent, down from a peak of 10.6 per cent in October 2022.
However, core inflation remains higher at 3.4 per cent, while services inflation is stuck at four per cent. Policymakers are also concerned that wage growth remains too high.
Lagarde said “we need to be further along in the disinflation process before we can be sufficiently confident that inflation will actually hit the target in a timely manner and in a sustainable way”.
She also noted that the ECB was keeping a close eye on disruption in the Red Sea, which has put up shipping costs and raised concerns of a resurgence in inflation.
Progress on inflation in the eurozone has also come at the cost of stalling growth. The eurozone economy contracted 0.1 per cent in the third quarter of 2023 with most economists thinking it fell into recession in the second half of last year.
Recent survey data out this week showed that eurozone business activity remained in contraction as the dominant services sector was hamstrung by weak demand.
“Tight financing conditions are dampening demand, and this is helping to push down inflation,” the ECB said.