The European Central Bank left its key interest rate untouched at a record high Thursday, keeping credit expensive for businesses and consumers as it tries to make sure inflation is firmly under control before cutting borrowing costs — a move expected later this year. The question is, how much later this year. Financial markets are expecting a rate cut from 4% as early as April, but ECB President Christine Lagarde said she and other bank officials agreed it was “premature to discuss rate cuts.”
Quick Read
Key Points of European Central Bank’s Interest Rate Decision:
- ECB Maintains High Interest Rate: The European Central Bank (ECB) decided to keep its key interest rate at a record high, continuing to prioritize controlling inflation before considering rate cuts.
- Market Expectations vs. ECB Stance: While financial markets anticipate a rate cut from the current 4% as early as April, ECB President Christine Lagarde stated that it is premature to discuss rate reductions.
- Inflation Trends in Europe: Inflation in the eurozone has decreased significantly, dropping to 2.9% in December after peaking at 10.6% in October 2022. The ECB aims to stabilize it at around 2%.
- Geopolitical Risks to Inflation: Lagarde highlighted concerns that the Israel-Hamas conflict and associated regional tensions could impact energy prices and trade, potentially affecting inflation.
- Global Stock Market Reactions: Expectations of an end to aggressive rate hikes have led to a rally in global stock markets, with significant gains in U.S. and European indices.
- Fed’s Rate Cut Indications: Similar to the ECB, the U.S. Federal Reserve has signaled potential rate cuts, with three reductions expected in 2024.
- Impact on Investments: Lower interest rates generally make stocks more attractive compared to safer investments, stimulating business activity and potentially increasing share prices.
- Actions by Other Central Banks: Norway’s central bank also maintained its current rate, while Turkey’s central bank, facing high inflation, raised its key rate to 45%.
- ECB’s Rate Hike History: The ECB has rapidly increased its key interest rate from negative levels to 4% to combat inflation.
- Economic Slowdown Concerns: While rate hikes help control inflation, they can also slow down the economy, as evidenced by a slight contraction in the eurozone’s economy.
- Inflation Drivers and Labor Market: Inflation was driven by supply chain issues and higher food and energy prices, with the labor market now impacting inflation through wage increases.
- ECB’s Cautious Approach: The ECB is moving cautiously, waiting for more data on wage increases and inflation trends before considering rate cuts.
The ECB’s decision reflects a balancing act between managing inflation and supporting economic growth, with a cautious approach in light of various global economic and geopolitical factors.
The Associated Press has the story:
European Central Bank leaves key interest rate at a record high
Newslooks- FRANKFURT, Germany (AP) —
The European Central Bank left its key interest rate untouched at a record high Thursday, keeping credit expensive for businesses and consumers as it tries to make sure inflation is firmly under control before cutting borrowing costs — a move expected later this year.
The question is, how much later this year. Financial markets are expecting a rate cut from 4% as early as April, but ECB President Christine Lagarde said she and other bank officials agreed it was “premature to discuss rate cuts.”
At a news conference, she reiterated her stance that the bank would make decisions based on the latest figures about the economy’s health rather than offering a longer-term timetable for rate moves.
She said inflation has declined — reaching 2.9% in December after peaking at 10.6% in October 2022 — and it was expected to keep easing this year en route to the bank’s goal of 2%.
Lagarde cautioned, however, that disruption from the Israel-Hamas war, including related attacks on ships in the Red Sea by Yemen’s Houthi rebels, could disrupt that progress.
Risks for higher inflation “include the heightened geopolitical tensions, especially in the Middle East, which could push energy prices and freight costs higher in the near term and hamper global trade,” she said.
But with inflation falling considerably in major economies like Europe and the United States, financial markets are frothing in hopes of cheaper credit that would boost business activity and stock prices.
Stock investors saw their holdings, such as those in U.S. retirement accounts, soar in the last weeks of 2023 as the U.S. Federal Reserve and ECB indicated that a rapid series of rate hikes was ending. Fed Chair Jerome Powell said officials discussed prospects for rate cuts at the bank’s December meeting, and the U.S. central bank has indicated it would cut its key interest rate three times this year.
The S&P 500, a broad measure of U.S. large company shares, has hit record highs this week, and European indexes also have risen. The global stock rally faces questions about whether gains can continue.
Rate cuts make riskier investments like stocks more attractive than safer bets like money market accounts and certificates of deposit. They also stimulate business activity and thus prospects for share prices to go higher.
Like the ECB, Norway’s central bank kept rates steady Thursday. The same day, the central bank in Turkey, which is suffering from out-of-control inflation of nearly 65%, raised its key rate to 45%, expected to be the last increase for some time.
Europe has seen inflation drop rapidly, with the ECB raising its key rate from negative levels — which made it cheap to borrow money to buy a house or invest in a business — to a record-high 4% in a little over a year.
While rate hikes are a central bank’s chief weapon to snuff out inflation, they also can slow the economy — which has been seen in Europe and countries around the world, feeding expectations for cuts now that inflation has dropped closer to preferred levels.
The economy of the 20 European Union member countries that share the euro currency, where the ECB sets interest rates, shrank slightly in the July-to-September quarter of last year. Expectations are no better for the following months.
The economic squeeze follows a surge of inflation fueled by a supply chain crunch during the COVID-19 pandemic and then higher food and energy prices tied to Russia’s war in Ukraine. The worst of the energy costs and supply problems have eased, but inflation has spread through the economy as workers push for higher wages to keep up with the boost in prices they’re paying.
Analysts say there are good reasons for the ECB to move cautiously. For one, having to reverse course and raise rates if inflation doesn’t keep falling — or spikes again — would only prolong the pain from tighter credit.
Another is the speed of pay raises for Europe’s workers. ECB officials have indicated that they want to see figures for wage increases for the first months of this year before deciding where they think inflation is headed.
“We need to be further along in the disinflation process before we can be sufficiently confident that inflation will actually hit the target in a timely manner,” Lagarde said.
