Despite the expectation of some analysts in the market that the tightening would take a break, the European Central Bank (ECB) did not skip the September meeting to fight inflation. The bank made its 10th consecutive interest rate increase in tightening.
The European Central Bank (ECB) decided to increase interest rates by 25 basis points.
Bank deposit interest rate is 4 percent; policy rate 4.50 percent; It increased the overnight lending interest to 4.75 percent. Thus, deposit interest reached the level that economists predicted as the peak of the Eurozone’s most aggressive monetary tightening cycle to date.
The expectation of economists participating in the Bloomberg survey was to keep interest rates constant.
In the statement published with today’s decision, the ECB Governing Council stated that interest rates have now reached a level that will make a “significant contribution” to controlling inflation and that borrowing costs will be kept “at sufficiently restrictive levels for as long as necessary.”
Signals of tightening in the decision text attracted attention. While it was emphasized in the text that inflation would continue to appear high for a long time, it was also stated that the ECB would continue to keep interest rates at a tightening level as long as necessary.
Inflation expectations increased, growth expectations decreased
Along with the decision text, the projections expected by the markets were also announced. It was observed that the bank increased its inflation expectations for the next two years, while also decreasing its growth expectations.
The bank increased its 2023 inflation expectation from 5.4 percent to 5.6 percent; It increased its 2024 expectation from 3 percent to 3.2 percent. The inflation expectation for 2025 was determined as 2.1 percent.
The ECB reduced its 2023 growth forecast for the Eurozone from 0.9 percent to 0.7 percent. The growth expectation for 2024 decreased from 1.5 percent to 1 percent. There was also a limited revision to the 2025 growth expectation. The growth expectation for 2025 was 1.5 percent.
Lagarde’s prominent statements in her statements were as follows:
The economy looks weak in the third quarter as well. The momentum will increase over time. The job market looks solid so far. The momentum in
employment growth is slowing. The services sector creates less employment.
Governments should withdraw financial support. Fiscal policies should make economies more efficient. The EU governance framework should be completed by the end of this year.
Many indicators of core inflation started to decline.
Energy and food pose upside risks in terms of inflation. Weakening demand poses a downside risk to inflation. Credit dynamics weakened and interest rates increased.
We are determined to reduce inflation to the 2 percent target on time. Current interest rates will help with the 2 percent target. The ECB is ready to review all its instruments if the need arises.
A significant majority of ECB members voted in favor of the decision. Some members advocated taking a break.
We cannot say that ECB interest rates have reached their peak.