European Central Bank keeps interest rates unchanged – E24

European Central Bank keeps interest rates unchanged – E24

Price inflation in the euro area has fallen sharply. The interest rate on the euro remains stable.

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The European Central Bank (ESB) kept interest rates unchanged at 4 percent.

This is the second meeting in a row that the euro zone interest rate has been allowed to remain unchanged, after ten consecutive increases before that.

Central Bank Governor Christine Lagarde reiterated that the interest rate is at a level that would contribute significantly to reducing price inflation towards the 2 percent target, given it persists long enough.

Our future decisions will ensure that interest rates are set at sufficiently restrictive levels for the longest period necessary, Lagarde says.

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In advance, it was widely expected that the interest rate would neither rise nor fall. All Bloomberg economists collected estimates of expected interest rates unchanged.

– This was exactly as expected, as the interest rate had the desired effect with a sharp decline in inflation. The inflation risk is very moderate in Europe now. This means that they, like the USA, can now pave the way for lower interest rates, says Kerry M. Knudsen, chief economist at Sparebank 1 SR-Bank about today’s decision.

– Interest rate cuts were not discussed

When interest rates were last held steady, many economists believed there were clear signs that the eurozone had reached peak interest rates.

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The discussion about interest rate setting by the European Central Bank recently has been about when the interest rate will be cut for the first time, and to what extent the ECB will cut interest rates over the next year.

The market expects several interest rate cuts next year. It’s almost fully priced as the first sale is already coming in March. The market also expects a total of six interest rate cuts during 2024.

Lagarde believed after the previous interest rate meeting that it was too early to discuss interest rate cuts. When asked about thinking about lowering interest rates this time, Lagarde emphasized that one is primarily data-driven and will make assessments from one meeting to the next.

-Should we lower our guard? No, we should never let our guard down.

– We did not discuss interest rate cuts at all. “I think everyone in the room believes that between raising interest rates and lowering them there is a whole plateau where the interest rate remains fixed,” Lagarde answered about the discussions in the committee that sets the interest rate.

Low price growth

Price inflation in the eurozone has calmed sharply this fall. High inflation is the backdrop to many of the interest rate increases seen.

In November, price growth moderated further to 2.4 percent in the euro area. Core inflation, which ignores the prices of food, energy, alcohol and tobacco, declined at the same time to 3.6 percent on an annual basis.

Lagarde notes that core inflation has declined further.

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The central bank notes that inflation is likely to rise again in the short term, due to energy-related base effects. Overall, price growth is expected to gradually decline over the next year, before heading towards the target in 2025.

Eurozone inflation estimates have been revised downward since September. The ECB now expects prices to grow by 5.4 percent in 2023, 2.7 percent in 2024, 2.1 percent in 2025, and 1.9 percent in 2026.

Like many other central banks, the ECB has set an inflation target of stable price growth of around 2%.

At the same time, economic growth estimates were revised downward somewhat. The European Central Bank expects growth of 0.6 percent in 2023 and 0.8 percent in 2024, while growth is estimated to reach 1.5 percent in both 2025 and 2026.

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Dalila Awolowo

Dalila Awolowo

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