In light of recent geopolitical events and economic indicators, the European Central Bank (ECB) is anticipated to hold off on further interest rate hikes. The decision comes in response to easing inflation and ongoing conflicts in Ukraine and Israel-Gaza, which have increased economic uncertainty in the eurozone.
At an intermediate meeting held on Monday, the ECB's Governing Council (GC) maintained key interest rates at 4.0% for deposits and 4.5% for Refi, reflecting underlying inflation trends that exceed the central bank's key objective of a 2% target rate. ECB President Christine Lagarde has reportedly warned about keeping higher-for-longer interest rates until there's confidence in reaching the 2% inflation target by the end of 2025.
The meeting took place amidst growing uncertainties such as wage growth dynamics and Middle East conflict-induced energy price pressure. The GC is anticipated to adopt a meeting-by-meeting approach, with potential future decisions influenced by a surge in US treasuries since September. This surge might increase European bond yields, potentially tightening monetary conditions and impacting Eurozone growth.
At a subsequent meeting held in Athens, policymakers indicated that they are likely to pause interest rate hikes due to these factors. The annual consumer price rise in the 20-nation currency bloc reached a two-year low of 4.3 percent in September, still exceeding the ECB's two-percent target. However, the impact of rising interest rates has been causing increasing household struggles across the bloc.
The ECB's key deposit rate stands at a record four percent after ten consecutive meetings of rate increases. However, enthusiasm for more hikes is waning among ECB's governing council members. French central bank governor Francois Villeroy de Galhau suggests that "current benchmark rates are appropriate".
Despite this, ECB board member Luis de Guindos warns of a long-term task in controlling inflation. Current projections don't anticipate inflation returning to the ECB's two-percent target before 2025. The governing council plans to revisit rate hikes at the December meeting, with new forecasts available.
The decisions and outlooks of the ECB are influenced by negative economic indicators, including Germany's deepening recession, which are reflected in the International Monetary Fund's downward revision of Germany's outlook. Despite upside risks on inflation suggesting potential future rate hikes, the October meeting is projected to have a limited impact on financial markets.
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