The European Central Bank (ECB) raised its benchmark interest rate on Thursday to its highest level since 1999, defying those who called for a truce so as not to worsen the slowdown in economic activity in the euro zone. After this tenth increase in a row since July 2022, the Frankfurt institution has not explicitly announced a pause in its draconian cycle of monetary tightening.
It indicates in its press release that "the Governing Council considers that the key interest rates of the ECB have reached levels which, maintained for a sufficiently long period, will strongly contribute to the return of inflation to the level as soon as possible. 'objective". ECB President Christine Lagarde said the decision to raise key rates again on Thursday was taken by “a solid majority” of the Governing Council, although some members would have “preferred a pause” in the tightening cycle monetary. “Obviously, some members did not draw the same conclusion, and some governors would have preferred a pause (...) but I can tell you that a solid majority agreed with this decision,” he said. she said during a press conference after the policy meeting. “We cannot say that we have reached the peak” of rates announced Christine Lagarde.
The ECB has chosen to stay the course, fourteen months after launching the fastest and largest rate increase cycle in its history, by 4.50 percentage points to date. A decision that she justifies by asserting that “if inflation continues to slow, it should always remain too high for too long a period”. The ECB also raised its inflation forecasts for 2023 and 2024 on Thursday, due to the impact of energy prices.
The monetary institution's new macroeconomic projections forecast a price increase of 5.6% in 2023, then 3.2% in 2024 and 2.1% in 2025, approaching the medium-term objective of 2.0 %.
Also read: Inflation is not under control, rates can still rise
The ECB faced a dilemma on Thursday, making its decision more uncertain than ever, as economic activity in the euro zone shows real signs of contraction. The monetary tightening of recent months has led to a surge in borrowing costs for households and businesses, influencing demand and therefore the distribution of credit.
Once limited to the manufacturing sector, the slowdown gradually spread to the services sector. The PMI index reached its lowest level in 33 months, with activity contracting at a pace not seen since the fall of 2020 and the first year of the pandemic. The ECB thus lowered its growth forecasts in the euro zone until 2025 on Thursday. This should only reach 0.7% in 2023, compared to 0.9% previously expected, then 1.0% in 2024 and 1. 5% in 2025.
This dilemma between inflation and growth has given rise to an intense debate between euro zone central bankers in recent weeks. Faced with inflation considered stubborn, the risk of not doing enough appeared higher than the risk of doing too much, as insisted by the “hawks” who have dominated the debate at the ECB council for over a year. .
The rate increase of 0.25 percentage points decided on Thursday, as in July, brings the bank liquidity deposit rate at the ECB, which refers, at 4.00%, to the highest since the creation of the ECB in 1999. The aim of the ECB is to continue to slow down economic activity so that companies and businesses stop raising prices, and so that their employees moderate wage demands, which tend to fuel inflation.
“The fear of not fully controlling inflation and the risk of stopping too soon must have been a greater concern than the growing risk of recession in the euro zone,” commented Carsten Brzeski, of the ING bank, after decision. But he also believes that the ECB announced on Thursday “the final increase” of the monetary tightening cycle.