ECB's Bold Move: Record High Rates Set to Signal Surprising End

2023-09-14 22:55:26

ECB Raises Rates to Record High, Signals End to Hikes

• ECB raises key rate for 10th straight time
• Increases inflation forecast for next year
• 2023-24 growth forecasts are cut
• "Solid majority" for hike, some dissent

FRANKFURT - The European Central Bank (ECB) raised its key interest rate to a record high of 4% on Thursday, signaling that this will likely be its last hike after ten consecutive increases aimed at combating inflation. Despite the persistent rise in prices exceeding the target rate, the sluggish euro zone economy and challenges like high borrowing costs and a downturn in China have created a dilemma for policymakers.

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The ECB also revised its inflation forecasts, now projecting a slower decline towards its 2% target over the next two years, while simultaneously cutting growth forecasts. This indicates the tough position the ECB finds itself in, with the need to balance combating inflation with supporting economic activity.

In response to the rate hike and the ECB's suggestion that further hikes may not be imminent, euro zone bond yields and the euro fell, while European shares rose as investors speculated that rate cuts could be on the horizon. While ECB President Christine Lagarde did not rule out additional hikes in the future, she emphasized the need for interest rates to remain at restrictive levels for a sustained period.

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Rate Cuts?

Lagarde, during a press conference, stated, "The focus is going to move, going forwards, to the duration, but that is not to say - because we can't say that now - that we are at peak."

Although some ECB board members opposed the rate hike, a "solid majority" of governors supported the decision. However, the absence of clear indications for further rate hikes or plans to withdraw liquidity from the banking system led traders to anticipate rate cuts next year.

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Market rates have already started to decrease after the rate hike, suggesting some skepticism about the ECB's commitment to keeping borrowing costs elevated for an extended period. This development could pose challenges for policymakers as they try to manage market expectations.

The Federal Reserve and the Bank of England are also closely watched, with the Fed expected to keep rates unchanged in its upcoming policy meeting and the Bank of England still likely to hike rates despite some repricing following the ECB decision.

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As for the downgrade in growth forecasts by the ECB - with projected growth for the euro zone this year lowered to 0.7% - Lagarde insisted that the slowdown is temporary and not an indication of an impending regional recession.

Overall, the ECB's rate hike to a record level signifies a shift towards a more cautious approach and raises questions about the future direction of monetary policy.

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