The European Central Bank Pauses Interest Rate Hikes to Tackle Inflation

The European Central Bank (ECB) is taking a pause on interest rates in the fight against inflation after ten hikes in a row. She did not touch on the key sentences at her external meeting in Athens on Thursday. The key interest rate therefore remains at 4.50
Percent. And the deposit rate that banks receive for parking excess funds, which is the benchmark on the financial markets, also remains at 4.00 percent. This is the highest level since the start of the monetary union in 1999.

“The future decisions of the Governing Council of the ECB will ensure that key interest rates are set at a sufficiently restrictive level for as long as necessary,” explained the euro watchdog.

Experts expected this

Ifo President Clemens Fuest speaks of a “good decision”. The rapid interest rate increases over the past year or so have helped to curb inflation and stabilize inflation expectations. “This development is expected to continue in the coming months. However, it is still too early to cut interest rates. For this to happen, inflation must continue to decline. “There is no guarantee that this will happen, especially because of high wage agreements and risks with energy prices,” says Fuest.

Agenda Austria economist Jan Kluge had also expected the ECB interest rate break in advance. This was supported by the sharp decline in demand for loans from both households and companies, parallel to the extremely weak economic situation in Europe. “The ECB must now dampen expectations that interest rates will soon fall again. Because of the second-round effects, especially wage increases, I think 2024 is rather optimistic. Interest rates are not likely to go down until 2025,” Kluge told KURIER.

The fact that lending has collapsed is particularly evident in inventories. Compared to September 2022, the loan portfolios of households and companies in the euro area remained almost constant (+0.4%; +46 billion euros). In the previous year they rose by almost half a trillion euros (+4.3%, +494 billion euros). The total loan portfolio is likely to even decline soon. This was last the case in 2015, recalls Kluge.