ECB President Christine Lagarde. Photo: Reuters
In a dilemma between raising interest rates to combat inflation and keeping them steady, the European Central Bank (ECB) ultimately chose to increase rates to a record high. This 0.25 percentage point rise may be the last for some time, as indications suggest the end of the ECB’s cycle of rate hikes.
The euro depreciated in value on money markets following this announcement, signaling a potential conclusion to the string of increases.
Whichever decision the ECB made, there were risks involved. If rates had remained the same, critics would claim that the bank had given up prematurely in the battle against rising prices that could persist due to wage pressures. Opinions on the duration of inflation’s rise remain divided.
On the other hand, the decision to raise rates to an unprecedented 4%, marking the 10th consecutive increase since 2001, comes as officials reduce growth forecasts for the eurozone. However, this interest rate hike will drain more money from the economy and potentially contribute to the already sluggish growth.
For many Irish individuals with mortgages on variable interest rates, this latest increase amplifies the pressure to receive government assistance in coping with mounting living costs.
Yet there is a glimmer of hope in economists’ predictions that major central banks are nearing the end of their rate hikes. This hope is grounded in the possibility of decreasing inflation and the belief that higher borrowing costs will temper the enthusiasm of interest rate hawks. The ECB itself has hinted that borrowing costs in the eurozone have peaked, stating that “interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”
ECB President Christine Lagarde confirmed that a “solid majority” of the bank’s board supported the latest rate hike, but she acknowledged that a minority advocated for a pause. The ECB has revised its inflation forecast for this year from 5.4% to 5.6% and increased its 2024 inflation projections from 3% to 3.2%, with a slightly higher rate of 2.1% projected for 2025.
While eurozone inflation has declined from a peak of 10.6% last year to 5.3% in August, concerns have arisen with the recent rebound in oil prices, raising doubts about sustained inflation reduction. Conversely, the ECB’s downward revision of growth forecasts for the eurozone economy reflects a sobering outlook. The projected growth rate for this year has been decreased from 0.9% to 0.7%, and the forecast for 2024 has been adjusted from 1.5% to 1%.
This decision represents the toughest challenge since the initial rate hike in July of the previous year. The cumulative effect of these 10 consecutive increases has led to the current high rate.
Although beleaguered homebuyers may find solace in the prospect of this being the end of the rate-hike trend, nothing is guaranteed.
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