Concerns about the economy are growing: ECB extends interest rate break

Concerns about the economy are growing
ECB extends interest rate break

December 14, 2023, 2:15 p.m

Listen to article

Despite declining inflation and economic concerns, the European Central Bank is leaving key interest rates unchanged. The financial market is assuming that the ECB will cut interest rates in the spring.

The European Central Bank (ECB) is leaving interest rates in the euro area unchanged for the second time in a row. According to a decision by the ECB Council, the key interest rate at which banks can obtain fresh money from the central bank remains at 4.5 percent, as the monetary authorities in Frankfurt am Main announced.

According to Central Bank President Christine Lagarde, a reduction in interest rates is currently not an issue in the ECB Council. “We have not discussed interest rate cuts at all,” she emphasized at the press conference after the interest rate decision in Frankfurt. It is clear that there is “a whole plateau” between interest rate increases and decreases, where it is important to maintain the monetary policy level.

Inflation in the common currency area has recently weakened surprisingly significantly. At the same time, concerns about the economy are growing. The US Federal Reserve (Fed) had previously left the key interest rate in the USA unchanged for the third time in a row and promised interest rate cuts in the coming year.

Many economists expect that the euro’s monetary authorities will also lower interest rates next year. However, Lagarde recently warned against declaring victory over inflation. Rather, it is still necessary to remain vigilant until the inflation rate returns to the medium-term target of two percent. Bundesbank President Joachim Nagel warned: “It would be premature to reduce key interest rates soon or to speculate about such steps.”

Inflation in the euro area weakened significantly in November. According to the statistics office Eurostat, consumer prices were 2.4 percent above the level of the same month last year, after 2.9 percent in October. Last year, the inflation rate was at times in the double digits as a result of Russia’s war of aggression against Ukraine. In the medium term, the ECB is aiming for stable prices with an inflation rate of 2.0 percent for the common currency area with its 20 member states.

ntv now also on Whatsapp

ntv on Whatsapp – that’s how it works

The Whatsapp broadcast channel ntv.de Subscribing is very easy: the invitation link

https://on.n-tv.de/9/ntvaufwhatsapp

Tap and follow the instructions. Click on the bell at the top right to subscribe to the channel.

With regard to the dangers of inflation, Lagarde said: “We should definitely not lower our guard.” It is important to avoid the risk of possible “second-round effects”. Such effects could occur if wages rise more than expected and thus fuel inflation again. Lagarde emphasized that the ECB needs more data on the development of wages and profits on a more sustainable basis. The ECB decides from meeting to meeting and bases its decision on the data available.

Series of interest rate hikes to combat high inflation

After an unprecedented series of ten interest rate increases in a row in the fight against high inflation, the monetary authorities stopped tightening interest rates for the first time in October. Higher interest rates make loans more expensive, which can slow down demand and counteract high inflation rates. More expensive loans are also a burden for the economy because loan-financed investments become more expensive.

The economy in the euro area is weakening. According to Eurostat, economic output shrank by 0.1 percent in the third quarter compared to the previous quarter. In the second quarter, gross domestic product (GDP) grew by 0.2 percent after stagnation at the beginning of the year. According to estimates by the federal government and economists, the German economy will continue to shrink slightly in 2023 as a whole. According to the most recent decision by the ECB Council, the deposit interest rate that banks receive for parked funds remains at 4.0 percent. This is the highest level since the monetary union was founded in 1999.