The European Central Bank held interest rates steady for the first time in more than a year on Thursday as policymakers move to the next phase of their fight against inflation amid signs the region’s economy is weakening.
Officials have turned their attention to how long they will need to keep interest rates high to bring inflation down to the central bank’s target. The bank, which sets rates for the 20 countries that use the euro, kept deposit rates at 4 percent, a record high.
“Inflation is still expected to remain very high for a long time, and domestic price pressures will remain strong,” central bank President Christine Lagarde told a news conference in Athens. “At the same time, inflation has declined significantly over the past month” and some measures of inflation that would indicate persistence have moderated, he said.
The decision to keep interest rates on hold was telegraphed last month when, after a 10th consecutive hike, policymakers indicated it could be done. The annual rate of inflation in the eurozone fell to 4.3 percent in September, from a peak of 10.6 a year earlier. But the rate is not projected to return to the central bank’s 2 percent target until the third quarter of 2025, as central bank staff estimated last month. Core inflation, which strips out volatile food and energy prices, slowed to 4.5 percent last month.
The European Central Bank has imposed its most aggressive measure of monetary tightening since July 2022 to curb high inflation, which was triggered by rising energy prices last year. Interest rates were raised from below zero to the highest in the central bank’s two-decade history, and bond-buying programs started to stimulate the economy have been scaled back.
This policy stance has stunted economic growth. Earlier this week the central bank had said this Demand for credit by firms and households fell sharply in the third quarter of this year, and far more than initially expected. This has come to light from separate data published this week Business activity in the block contracted in October As new orders declined and companies cut jobs.
Previous rate increases “will continue to be forcefully transmitted through financing conditions,” Ms. Lagarde said. “This is reducing demand sharply and that helps reduce inflation.”
The region’s economy “remains weak”, he said, and will remain weak for the foreseeable future as manufacturing output has declined, foreign demand has slowed and consumer spending has slowed.
But focusing on reining in inflation, policymakers said inflation should return to target if interest rates remain at their current levels for a “sufficiently long period.”
But Ms Lagarde gave few indications as to when that would happen. “Now is not the time for forward guidance, now is the time to stick to our data reliance,” he said.
Traders are betting that interest rates will be cut in the latter half of next year as restrictive monetary policy weighs on the economy. But there is renewed uncertainty about the path of inflation as energy prices surged this month amid the Israel-Hamas conflict, and concerns that if the conflict spreads it could jolt global energy markets. .
“Increased geopolitical tensions could push energy prices higher in the near term, while the medium-term outlook will become more uncertain,” Ms Lagarde said. However, at the same time, these tensions could worsen the global economic environment and ultimately exert downward pressure on prices, he said.
This month’s meeting was held in Athens, just days after the country’s debt was given an investment grade rating by S&P, ending a 13-year period of being classified as junk bonds.
Once a year the central bank holds a meeting of its Governing Council in a different country in the eurozone. This year’s meeting was the first in Athens since 2008 and coincides with a turnaround in the Greek economy, where unemployment is at its lowest in more than a decade and the economy has grown strongly in recent years. “Greece has demonstrated unprecedented recovery potential,” Ms Lagarde said.