The European Central Bank (ECB) has raised its key benchmark rates by a quarter percentage point, marking the tenth consecutive increase and setting a new record high. The deposit rate now stands at 4%, up from below zero last year, as the ECB continues its aggressive fight against persistent inflation in the Eurozone.
This decision comes in response to revised forecasts for inflation in 2023 and 2024, which are now expected to average 5.6% and 3.2%, respectively. However, the projection for 2025 has been slightly revised down to 2.1%. The ECB's Governing Council expressed its determination to ensure that inflation returns to its 2% medium-term target in a timely manner.
The ECB's measures are considered the most aggressive cycle of interest rate rises in Europe since Bundesbank records began in 1949, according to Deutsche Bank analysts. In its statement, the ECB's Governing Council noted that it believes the key ECB interest rates have reached levels that, if maintained for a sufficiently long duration, will contribute substantially to the timely return of inflation to the target.
The ECB's decision could increase pressure on the Bank of England (BoE) to hike UK rates when its Monetary Policy Committee meets next week. The MPC is expected to raise UK rates by a quarter point to 5.5%.
Despite these measures, there is uncertainty over how much a slowdown in Eurozone growth, coupled with the ECB's past rate increases, will impact the region's inflation rate, which stood at 5.3% in August. Investors are now focusing on the prospect of interest-rate cuts expected to begin next year as inflation and economic growth cool.
The ECB's actions have led to a fall in Eurozone bond yields and a 0.6% slip of the euro against the dollar. Central banks across Europe now face the challenge of managing slowing economic growth alongside high inflation. The ECB expects its rate increases to slow the region's economy by affecting asset prices and demand for loans.
ECB economists have revised their growth expectations for the Euro area economy to 0.7% in 2023, 1.0% in 2024, and 1.5% in 2025. The ECB President, Christine Lagarde, is expected to maintain high-interest rates for some time while pushing back against the idea of imminent rate cuts.
Investors are closely monitoring the future trajectory of interest rates, which affects a range of asset prices. They expect the ECB to hold interest rates at about 4% through next summer before starting to cut them, according to data from Refinitiv. Meanwhile, the Federal Reserve is expected to hold rates steady in a range between 5.25% and 5.5% at its meeting next week and to begin cutting rates early next year.
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