Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The European Central Bank has kept interest rates unchanged, bringing an end to its unprecedented streak of 10 consecutive increases in borrowing costs.
The decision, which was announced after ECB rate-setters gathered in Athens for their annual meeting outside of the bank’s Frankfurt headquarters, was expected by analysts after eurozone inflation more than halved from its peak and the economy showed signs of weakening.
The benchmark deposit rate is now 4 per cent — four-and-a-half percentage points above its all-time low of minus 0.5 per cent.
The ECB’s pause follows the Bank of Canada’s decision to hold its main interest rate at 5 per cent yesterday, and comes ahead of expected holds by the US Federal Reserve and Bank of England next week.
The decisions underline how major central banks appear to judge they are close to having done enough to tame inflation.
Rate-setters must now assess how long rates need to stay high to return inflation to their targets of 2 per cent.
In the eurozone, meanwhile, concerns over the weakness of the economy are mounting, with analysts expecting GDP figures for the third quarter, out next week, to show a contraction in output.
The ECB said in its statement that inflation was “expected to stay too high for too long, and domestic price pressures remain strong”, but it added that the impact of its earlier rate rises was “dampening demand and thereby helps push down inflation”.
ECB president Christine Lagarde, who is now holding a press conference, is expected to face questions on what the conflict between Israel and Hamas could mean for energy prices and whether the eurozone economy may contract in the second half of this year.
Oil prices remain slightly below where they were at the last ECB meeting six weeks ago, despite fears war could spread through the Middle East. However, European natural gas prices have climbed about a third in that time amid worries about supply disruptions.
Eurozone inflation has dropped from a peak of 10.6 per cent a year ago to 4.3 per cent in September. Some economists think it could fall close to 3 per cent when October price data is published on Tuesday.
The ECB said keeping rates at their current level “for a sufficiently long duration will make a substantial contribution” to achieving its inflation target. It added that “rates will be set at sufficiently restrictive levels for as long as necessary”.
The eurozone economy has achieved at best tepid growth for the past three quarters, as higher borrowing costs have squeezed activity.
Economists have been cutting their forecasts for the remaining two quarters of the year and warning of a potential recession after this week’s survey of purchasing managers and data on bank lending pointed to a sharper contraction than anticipated.
The weakness in the economy is expected to put more strain on the hitherto resilient labour market and add downward pressure to prices.
“The bar for resumed hiking appears relatively high,” said Paul Hollingsworth, chief economist for Europe at French bank BNP Paribas, adding that growth and inflation in the eurozone were “on track to be in line with, if not weaker than” the ECB’s own projections.
The ECB expects no growth in the third quarter, with inflation averaging 5 per cent.
Financial markets largely brushed off the pause, with stock markets stuck in negative territory and government bond yields stable.
The region-wide Stoxx Europe 600 remained 0.8 per cent lower in early afternoon trade, with France’s Cac 40 and Germany’s Dax stuck 0.7 per cent and 1.3 per cent lower on the day.
The yield on 10-year German Bunds fell 0.01 percentage points to 2.87 per cent, while the yield on Italy’s 10-year bond was down 0.02 percentage points at 4.89 per cent. The euro barely budged against the dollar, down 0.3 per cent.
Additional reporting by George Steer
Source: Economy - ft.com
