In an attempt to curb consumer price increases, despite a weakening eurozone economy, the European Central Bank has raised interest rates to an unprecedented level. The ECB's governing council in Frankfurt made a finely balanced decision to raise its deposit rate by 25 basis points to 4.5 percent on Thursday, marking the 10th consecutive rate hike. This move coincided with officials lowering their growth projections for the eurozone economy.
Following the ECB's decision, the euro depreciated by 0.24 percent against the dollar, reaching $1.07. Additionally, yields on two-year German Bunds, which are considered a benchmark for the eurozone, decreased by 0.04 percentage points to 3.13 percent.
The ECB's decision was highly significant, with more dovish members of the governing council pointing to indicators of weaker growth, reduced bank lending, a cooling labour market, and declining inflation as reasons to advocate for a pause. In contrast, the hawks expressed concerns that inflation remained excessively high.
Thursday's decision pushed the ECB deposit rate above its previous record high in 2001, when policymakers raised interest rates to bolster the value of the newly introduced euro. The decision reflects policymakers' greater concern about the risk of sustained consumer price growth exceeding the target, as opposed to the potential for a sharp economic downturn.
In recent weeks, economists have scaled back their growth projections for the eurozone. This adjustment follows declines in industrial production and retail sales observed in July, along with business surveys indicating a further economic downturn in August. Rate-setters believe that the deceleration in economic activity is likely to alleviate inflationary pressures.
Eurozone inflation has already receded from its peak of 10.6 percent last year to 5.3 percent in August. Anticipated trends indicate a continued decline in inflation, with expectations of reaching the ECB's 2 percent target not until 2025. The recent resurgence in oil prices has raised concerns that the disinflation process may encounter some bumps along the way.
The US Federal Reserve and the Bank of England are scheduled to convene next week. Many economists anticipate that major central banks are approaching the conclusion of their interest rate hikes, as inflation is declining and economic growth is slowing due to increased borrowing costs.
