Pause or further rate hikes?: ECB faces a tough decision

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Is the European Central Bank (ECB) going to raise interest rates for the tenth consecutive time, or are the euro zone’s monetary authorities taking a break due to the weakening economy? Rarely has there been so much speculation about the future course ahead of an ECB Council meeting as there is this time. The central bankers’ decision will be announced this Thursday afternoon (14:15) in Frankfurt.

“With inflation still above five percent in the eurozone and even six percent in Germany, the ECB is likely to raise interest rates again by 25 basis points,” said Robert Greil, chief strategist at private bank Merck Finck. However, if the ECB decides not to raise interest rates again this Thursday, Greil believes that there will be no further interest rate increases in this interest rate cycle; Because according to economists, inflation will be significantly lower starting from September.

Unprecedented series

An unprecedented series of interest rate hikes since July 2022 is the ECB’s response to at times extremely high inflation. Since then, the central bank has raised interest rates in the euro zone nine times in a row. The interest rate at which commercial banks can receive fresh ECB money is currently 4.25 percent; this is the highest level at the beginning of the global financial crisis in early October 2008. Banks currently receive 3.75 percent interest if they park money at the ECB. accusations.

High interest rates are good for savers: Fixed-term deposits and daily deposits are starting to gain value again – even though a third of 800 banks and savings banks evaluated in Germany still do not pay interest or at most a quarter of a percent, according to the current assessment of the comparison portal Verivox low interest rates (as of September 8, 2023).

However, higher base interest rates also tend to make loans more expensive. This could slow demand and offset high inflation rates. Calls for interest rate cuts have been increasing recently as expensive loans also create a burden on the economy. Economists at the Landesbank Hessen-Thuringia (Helaba) recently warned that “however welcome the ECB’s fight against inflation is, it should not increase economic concerns for now.”

Predictions have been scaled back

Commerzbank analyst Marco Wagner does not expect the ECB to raise interest rates further. Wagner explained that the economic outlook has deteriorated significantly recently, with industrial production “already collapsing in March and has not recovered significantly since then.”

The EU Commission lowered its economic forecasts for the European Union. The authority expects economic growth of only 0.8 percent for the EU and the Eurozone this year. The ECB will announce its current forecasts this Thursday.

The ECB is still far from its stable price target, with a medium-term inflation rate of two percent in the euro area. The increase in consumer prices in 20 country currencies did not weaken further in August. According to the first estimate of the Eurostat statistical office, the annual inflation rate remained at 5.3 percent.

The latest data show “how stubborn the inflation monster is,” German Bundesbank President Joachim Nagel recently told Handelsblatt. “We have made a lot of progress in the fight against inflation. However, we are still far from reaching the target value in inflation.”

(SDA)

Source :Blick