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The European Central Bank has raised interest rates to an all-time high in an effort to curb consumer prices, but has indicated that the cycle of rate increases is nearing its end as the eurozone’s growth weakens.
During the ECB’s governing council meeting in Frankfurt, the decision to raise the deposit rate by 25 basis points to 4% was made, marking the 10th consecutive increase. This move came as officials reduced their growth forecasts for the eurozone.
Following the announcement, the euro fell to a three-month low against the dollar. By mid-afternoon trading, the currency had declined 0.5% to $1.0677.
Yields on the two-year German Bunds, which are a benchmark for the eurozone, dropped 0.04 percentage points to 3.13%.
Many economists believe that major central banks are nearing the end of their rate hikes due to falling inflation and slowing growth resulting from higher borrowing costs.
The ECB suggested that borrowing costs in the eurozone had reached their peak. It stated that the recent increase meant “interest rates have reached levels that, if maintained for a sufficient period, will significantly contribute to inflation returning to the target rate in a timely manner.”
Tomasz Wieladek, chief European economist at T Rowe Price, described this as a “very dovish hike” and stated that the ECB had clearly signaled its intention to keep rates on hold from now on.
With this move, the ECB deposit rate is now higher than the previous record set in 2001, when borrowing costs were increased to boost the value of the newly introduced euro.
This decision by the ECB is the most significant in over a year. While some more dovish council members argued for a pause due to signs of weaker growth, slowing bank lending, a cooling labor market, and falling inflation, others were concerned that inflation was still too high. Thursday’s move indicates that policymakers remain more worried about the risk of consumer price growth staying above the target than the risk of a sharp economic downturn.
The US Federal Reserve and the Bank of England are set to hold their meetings next week.
The ECB has revised its inflation forecast for this year from 5.4% to 5.6%, and for next year from 3% to 3.2%. However, it has slightly reduced its 2025 inflation forecast from 2.2% to 2.1%.
Although Eurozone inflation has declined from last year’s peak of 10.6% to 5.3% in August, the recent rise in oil prices has raised concerns about the stability of the disinflation process.
The deteriorating economic outlook for the eurozone is reflected in the ECB’s downward revision of its growth forecast for this year from 0.9% to 0.7%, and for next year from 1.5% to 1%.
Eric Dor, an economics professor at the IESEG School of Management in Paris, believes that Europe is heading towards a period of stagnant growth and sticky inflation. On the social media site X (formerly known as Twitter), he wrote, “Stagflation is now very plausible in the eurozone.”
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