The European Central Bank has decided to keep interest rates unchanged, marking the end of a 10-consecutive rate increase streak. This decision comes at a time when the Eurozone faces the possibility of recession and increased uncertainty in the global economy.
Major central banks, including the Federal Reserve, have also paused their interest-rate hikes due to easing inflation, following last year's multidecade highs. Investors are now monitoring the potential shift toward rate reductions to support economic growth, particularly outside the United States.
However, global economic challenges, such as the conflict between Israel and Hamas, ongoing tensions in Ukraine, and high energy prices, are complicating central banks' decisions. Additionally, rising global bond yields are exerting downward pressure on both growth and inflation.
The European Central Bank has opted to maintain its deposit rate at 4%, which is a record high for the institution established in 1998. ECB President Christine Lagarde has suggested that borrowing costs in the Eurozone may have reached their peak, as past rate increases are starting to affect the housing market and bank lending in the region.
Lagarde acknowledged the weakening of the Eurozone economy, with declining manufacturing output spilling over into other sectors, and a softening labour market with fewer new job creations.
The euro's value declined against the dollar following the ECB's announcement, reflecting investor expectations that Eurozone rates have likely peaked. Bond yields in the Eurozone, including Italy, also decreased, as Lagarde indicated that the ECB was not ready to reduce its substantial holdings of Eurozone government debt more quickly.
In contrast to the U.S., the ECB is in a more challenging position due to higher inflation in the Eurozone and significantly lower economic growth. While the Eurozone economy has been stagnating for about a year, the U.S. economy has been expanding.
The ECB also needs to keep an eye on weaker Southern European economies, such as Italy, where 10-year bond yields have recently risen to an 11-year high, increasing the cost of servicing the country's significant public debt.
Inflation across the Eurozone declined to 4.3% in September from a peak of over 10% last year, while the U.S. inflation rate last month was 3.7%.
Given the differences between the Eurozone and the U.S., the ECB is expected to closely monitor economic data to make further decisions.
