(UK) – The European Central Bank (ECB) has increased its key interest rate for the tenth consecutive time, reaching a historic high of 4% from the previous 3.75%.
This move by the ECB is in response to rising inflation levels, which it predicts will remain persistently high. Forecasts indicate that average inflation for 2023 will be around 5.6%.
However, the ECB has signaled that this latest rate hike might be the last for the time being. The bank believes that the current interest rate levels, if maintained for an extended period, will significantly contribute to a timely return of inflation to its target levels.
The ECB expects inflation within the 20-nation eurozone to decrease to approximately 2.9% next year and further drop to 2.2% by 2025.
Like other regions worldwide, the eurozone has been grappling with soaring food and energy prices, which have put pressure on household budgets.
Central banks globally have been raising interest rates in an effort to curb inflation. The rationale behind increasing rates is to make borrowing more expensive, thereby reducing disposable income and curbing excessive spending.
This, in turn, should lead to reduced consumer demand and help ease inflation. However, central banks must strike a balance to avoid causing a recession by raising rates too aggressively.
Currently, the UK has higher interest rates at 5.25%, but it also faces higher inflation at 6.8%. The Bank of England is expected to raise rates again in the coming week.
Central banks worldwide raise interest rates
The ECB has stated its determination to bring inflation back to its 2% target within a “timely manner.” However, policymakers acknowledged that they had significantly lowered their economic growth forecasts for the eurozone due to the impact of higher interest rates.
Economists at Pantheon Macroeconomics interpret the ECB’s communication as a clear indication that further rate hikes are unlikely.
They suggest that there is now a high threshold for any rate increases in the October and December meetings and see a narrow opportunity for rate cuts next year, although this scenario is not currently under consideration by the ECB.
ECB President Christine Lagarde did not rule out the possibility of future rate hikes but emphasized that the focus would shift to the duration of the current rates.
She noted that it was too early to determine whether the ECB had reached the peak of its rate adjustments.
In June, revised data revealed that the eurozone had experienced a recession during the previous winter, with Germany, the largest economy in Europe, contributing to the economic downturn.
A recession is typically defined as two consecutive quarters of economic contraction and can have adverse effects on businesses and employment.