ECB Raises Rate to Record High and Signals End of Hikes

September 14, 2023, 08.44 PM | Source: Reuters
ECB Raises Rate to Record High and Signals End of Hikes

ILUSTRASI. FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski//File Photo

CENTRAL BANK - FRANKFURT. The European Central Bank raised its key interest rate to a record peak on Thursday and signalled this will likely be its final move in a more-than year-long fight against stubbornly high inflation.

The central bank for the 20 countries that share the euro also raised its forecasts for inflation, which it now expects to come down more slowly towards its 2% target over the next two years, while cutting its expectations for economic growth.

That illustrated the dilemma the ECB faced at the meeting, with prices still rising at more than twice its target rate but economic activity struggling under high borrowing costs and a downturn in China.

Against this backdrop, the ECB sent a clear message it was probably done raising rates.

"Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target," the ECB said,

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This was expected to happen more slowly than at the time of the ECB's previous projections in June, with inflation now seen at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025.

The upgrade to the 2024 estimate - which had been reported by Reuters earlier - was likely to have played a significant role in discussions as policymakers weighed the risk inflation, currently still above 5%, would get stuck at a high level.

Thursday's 25-basis-point increase pushes the rate the ECB pays on bank deposits to 4.0%, the highest level since the euro currency was launched in 1999.

Just 14 months ago, that rate was languishing at a record low of minus 0.5%, meaning banks had to pay to park their cash securely at the central bank.

In the run-up to the meeting, money markets had expected the deposit rate to peak at 4.0% before being cut in the second half of next year..

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In contrast, markets have fully priced in unchanged rates at next week's meeting of the U.S. Federal Reserve, which started raising earlier and has moved higher than the ECB.

ECB President Christine Lagarde will hold a news conference at 1245 GMT.


Supporters of a hike this week are likely to have argued it was needed because inflation, including underlying measures that strip out volatile components, remained too high, with a recent surge in energy prices threatening a new acceleration.

But the brisk tightening cycle - twice as steep as normally envisaged by the ECB's own stress tests of the banking sector - has already left its mark on the euro zone economy.

With the manufacturing sector, which typically needs more capital to operate, already suffering as a result of higher borrowing costs, lending to companies and households has fallen off a cliff.

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Services has now also started to struggle following a brief post-pandemic boom in tourism.

The euro zone's biggest economy, Germany, was bearing the brunt of an industrial slump and heading for recession, according to several forecasts.

Once its rate increases end, the ECB is likely to begin a debate on mopping up more of the cash it pumped into the banking system through various bond-buying schemes over the last decade, although no decision on that matter was expected this week.

Editor: Yudho Winarto

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