ECB Indicates That Borrowing Costs May Have Peaked
The European Central Bank (ECB) has hiked interest rates by a quarter of a percentage point to a historic high but indicated that borrowing costs in the eurozone may have reached their zenith, causing the euro to plummet.
- In a decision characterized by division, ECB officials raised the bank's deposit rate to 4%, marking the tenth consecutive increase and a substantial climb from below zero just a year ago.
- During a press conference, ECB President Christine Lagarde hinted that this rate hike on Thursday might be the final one, though she did not entirely rule out additional increases in the event of disappointing economic data.
- Lagarde reiterated language from the bank's policy statement, stating that ECB officials believe that rates, if maintained at these levels for a significant period, will contribute substantially to lowering inflation to their 2% target.
Major central banks, including the Federal Reserve, have been signaling a potential halt to a series of interest rate increases implemented over the past 18 months, aimed at addressing inflation levels not seen since the 1970s.
- While ending rate hikes could be beneficial for borrowers amid global economic uncertainty, declining international trade, and weakened industrial output, it also risks allowing entrenched inflation on both sides of the Atlantic. Some central banks, such as those in Australia and Canada, previously indicated a pause only to resume rate hikes.
- Recent market movements indicate that investors are now betting on rate peaks and even potential reductions as early as the upcoming spring, as both inflation and economic growth are expected to decline.
According to data from Refinitiv, expectations are that the ECB will maintain interest rates at around 4% through the next summer before embarking on rate cuts. In contrast, the Fed is expected to keep rates steady in a range between 5.25% and 5.5% at its next meeting and potentially start reducing rates early next year. The Bank of England is anticipated to raise interest rates at least once more this year before considering rate cuts in the following year.
- European central banks face a unique challenge as recent rate hikes have had a notable impact on lending and potentially reduced economic growth, but they have not yet significantly affected underlying inflation.
- This contrasts with the U.S., where the Fed has raised rates higher than the ECB, leading to a substantial decrease in underlying inflation while maintaining robust economic growth. In August, underlying inflation stood at 5.3% in the eurozone and 4.3% in the U.S.
- Lagarde cautioned that Europe is currently undergoing a period of very sluggish growth and suggested that the ECB's rate increases are affecting the economy, leading to reduced hiring, particularly in the services sector, which has ties to manufacturing.
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