Are the rate increases over?
Fed and ECB moves and scenarios on rates. The commentary, post ECB meeting, by Azad Zangana, Senior European Economist and Strategist
In response to inflation rates among the highest since the 1970s, the ECB's main refinancing rate rose from zero in June 2022 to 4.5% in September 2023, while the deposit rate rose from -0.5 % to 4%.
The decision not to further tighten monetary policy was taken in response to the weakening eurozone economy, as manufacturers grapple with weak domestic and external demand, while service companies also report a slowdown of the activity.
The inflation rate has also moderated significantly in recent months, falling from a peak of 10.6% year-on-year in October 2022 to 4.3% in the latest data released in September. Much of this decline was caused by the impact of last year's rising energy prices, which fell short in the annual price comparison. Inflation is expected to fall further, but ECB President Christine Lagarde suggests risks of higher inflation remain.
Lagarde stated that: “Inflation is still expected to remain too high for too long a period of time; furthermore, strong internal pressures on prices persist."
However, referring to the decision to keep rates unchanged, he stated that: “We are determined to ensure the timely return of inflation to our medium-term target of 2%. Based on our current assessment, we believe that the ECB's key interest rates are at levels that, if maintained for a sufficiently long period, will make a substantial contribution to achieving this objective."
While there is no indication that further rate hikes are off the table, the language used suggests that the ECB should see a significant deterioration in the inflation outlook. In fact, the decision to keep rates unchanged was widely expected by financial markets.
Looking ahead, the next move will likely focus on the ECB's balance sheet and the pace of tapering support measures. Upward pressure on bond yields in recent times has been blamed on "external factors", but it is clear that the ECB continues to keep an eye on the ability of countries, in particular Italy, to finance themselves in a sustainable and orderly manner.
As for interest rates, the next move will likely be a cut, probably in 2024. The date and size of the cut will depend on progress made in bringing inflation back towards target.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/sono-finiti-gli-aumenti-dei-tassi/ on Sat, 28 Oct 2023 05:30:41 +0000.