Yahoo Finance ECB hits pause on interest rate hikes
The European Central Bank (ECB) has joined the Bank of England (BoE) and US Federal Reserve in hitting the pause button on its rate-rise programme after previously hiking interest rates to record levels.
The bank's governing council met in Athens on Thursday, rather than at its headquarters in Frankfurt, to set monetary policy across the eurozone.
The decision to leave borrowing costs unchanged comes after a 15-month streak of rises, with the bank saying inflation was starting to come down to its target.
Its main refinancing operations rate, which sets weekly borrowing costs for commercial banks, was left unchanged at 4.5%, while the marginal lending facility rate, offering overnight credit to banks, was unmoved at 4.75%.
Last month the ECB lifted its deposit rate to 4% – the highest since the euro was launched in 1999.
However, since then, inflation across the eurozone has fallen to 4.3% in the year to September, down from 5.2% in August. But this is still more than twice the ECB’s 2% target.
ECB president Christine Lagarde said on Thursday that the fall in inflation was due to improving supply conditions, the pass-through of previous falls in energy prices, and the impact of tighter monetary policy on demand and corporate pricing power.
The decision to hold rates at 4% will now spark a debate on how long rates need to stay at record highs, with markets already betting on the next move to be a cut as soon as June, with two full moves priced in by next October.
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"When they last met, ECB officials raised interest rates by 25bps, but they signalled that this was probably the last hike in this tightening crusade," Charalampos Pissouros, senior investment analyst at XM, said.
"Since then, several officials have argued that inflation could return to their 2% objective even without any additional hikes, while economic data continues to point to a wounded euro area economy. This convinced market participants no more rate increases will be delivered and allowed them to price in around 65bps worth of cuts for next year.
"Therefore, the attention will fall on clues and hints on whether policymakers are indeed considering the reduction of interest rates at some point next year, with anything validating this notion having the potential to further hurt the euro."
During the press conference Lagarde cautioned that the eurozone economy remained weak. "The economy is likely to remain weak for the remainder of this year, she said. "But, as inflation falls further, household real incomes recover, and the demand for euro area exports picks up, the economy should strengthen over the coming years."
She added that fewer new jobs were being created, including in services, consistent with the cooling economy gradually feeding through to employment.
Read more: LIVE: FTSE and European stocks fall as ECB holds interest rates
Marcus Brookes, chief investment officer at Quilter Investors, said: "Given the stagnating economy and the fact other central banks have moved into a holding pattern, something very unexpected would need to happen for rates to be raised again.
"The pressure will quickly shift to cutting rates given the lack of economic growth. This is the problem facing central banks now. They have successfully guided economies to this level of rates without tipping them into full-blown recessions, although Germany is experiencing one and others will have felt like they were in one.
"So how long can rates really remain at this level before things really start to bite? If they move too early, they risk bringing inflation back into the system – but move too late and the economic impact will be significant.
“With geopolitical events flaring up, it isn’t very easy being a central banker right now.”
Watch: How does inflation affect interest rates?
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