Inflation: pause or further interest rate hike? ECB faces difficult decision

2023-09-14 10:17:07

Pause or another interest rate hike? ECB faces difficult decision

Rarely has there been so much confusion about the future course before an interest rate decision. Is the tenth key interest rate increase in a row coming or are the monetary authorities taking a break? The decision will follow at 2:15 p.m.

Published today at 12:17 p.m

epa10169811 European Central Bank (ECB) President Christine Lagarde arrives for a press conference following the meeting of the Governing Council of the European Central Bank in Frankfurt am Main, Germany, 08 September 2022. EPA/RONALD WITTEK

KEYSTONE

High inflation persists. But because the economy is weakening, calls for an interest rate break in the euro area have recently become louder. How do the ECB’s monetary authorities decide?

Is the European Central Bank (ECB) raising key interest rates for the tenth time in a row – or are the euro area’s monetary authorities taking a break due to the weakening economy? Rarely has there been as much speculation about the future course before a meeting of the ECB Council as this time. The central bankers’ decision will be announced this Thursday afternoon (2:15 p.m.) in Frankfurt.

“With inflation still over five percent in the euro area and even over six percent in Germany, the ECB is likely to raise its key interest rates again by 25 basis points,” says Robert Greil, chief strategist at private bank Merck Finck. However, if the ECB decides not to raise interest rates again this Thursday, Greil believes that “there will not be another increase in this interest rate cycle” – because, according to economists, inflation will be noticeably lower from September onwards.

Nine increases in a row

The unprecedented series of interest rate increases since July 2022 is the ECB’s response to the extremely high inflation at times. Since then, the central bank has raised key interest rates in the euro area nine times in a row. The interest rate at which commercial banks can obtain fresh ECB money is now 4.25 percent, which is the highest it was at the start of the global financial crisis in early October 2008. If banks park money at the ECB, they currently receive 3.75 percent Interest charges.

The higher interest rates are good for savers: fixed-term deposits and daily deposits are worthwhile again – even if, according to a current overview by the comparison portal Verivox, a third of the 800 banks and savings banks evaluated in Germany still pay no interest or at most low interest rates of a maximum of one Quarter percent (as of September 8, 2023).

More expensive loans

However, higher key interest rates also tend to make loans more expensive. This can slow down demand and counteract high inflation rates. Because more expensive loans are also a burden on the economy, calls for an interest rate break have recently become louder. The ECB, “as welcome as its fight against inflation is, should not increase economic concerns for the time being,” economists at the Landesbank Hessen-Thüringen (Helaba) recently warned.

Commerzbank analyst Marco Wagner does not expect the ECB to raise interest rates further. The economic outlook has recently deteriorated significantly; industrial production “already crashed in March and has not recovered significantly since then,” Wagner explained.

Stubborn inflation

The EU Commission has just lowered its economic forecasts for the European Union. The authority only expects economic growth of 0.8 percent for the EU and the Eurozone this year. The ECB will present its current forecasts this Thursday.

The ECB is still a long way from its goal of stable prices with a medium-term inflation rate of two percent in the euro area. In August, the rise in consumer prices in the 20-country currency area did not weaken any further. According to an initial estimate by the Eurostat statistics office, the annual inflation rate remained at 5.3 percent.

The latest data shows “how stubborn the beast inflation is,” German Bundesbank President Joachim Nagel recently told Handelsblatt. “We have made a lot of progress in combating inflation. But we are still far from reaching our target value for inflation.”