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European Central Bank Raises Interest Rates To Highest In History, Now 4 Percent

By Stefan J. Bos, Chief International Correspondent Worthy News

FRANKFURT (Worthy News) -On Thursday, the European Central Bank (ECB) raised interest rates by a quarter of a percentage point, with the deposit rate reaching 4 percent, the highest in its two-decade history.

It was the 10th consecutive time the central bank of the 20 European Union countries using the euro raised interest rates to force inflation down within the bloc.

Critical experts say it comes after years of ‘printing money’ by bailing out struggling nations with the ECB buying government bonds.

The Frankfurt-based ECB, one of the world’s most important central banks, also made euros virtually free available to financial institutions with low or even negative interest rates.

“Inflation continues to decline but is still expected to remain too high for too long,” the central bank said in a statement. It increased rates to “reinforce progress” on lowering inflation.

The ECB suggested that it might have raised rates high enough to return inflation to target, although it didn’t rule out further rate increases in the near future.

Yet, markets and economists anticipate a lengthy pause, followed by rate cuts in the second half of next year.

UNCHANGED RATES

Markets had seen unchanged rates as the most likely outcome of Thursday’s meeting only days ago. However, expectations shifted towards a hike after a source close to the discussions said the ECB would raise its 2024 inflation projection in new forecasts, Reuters news agency reported.

“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 added in its published comments.

EU governments have struggled to form a united front with stubbornly high price growth figures and rising recession fears.

This ECB’s past policies of so-called “quantitive easing,” the introduction of new money into the money supply by a central bank, and the ongoing war in Ukraine have played a role in the current inflation, critical experts suggest.

Inflation is still stuck above 5 percent on average within the EU, and markets do not see it falling back to the ECB’s 2 percent target.

Inflation is expected to hover far above 2 percent even in the longer term as an exceptionally tight labor market pushes up wages, and high energy costs linked to enforced energy transition and the war in Ukraine keep pressure on prices.

However, Dean Turner, chief eurozone and UK economist at UBS Global Wealth Management, said: “We expect this to be the last hike from the ECB in this cycle, but that does not mean the era of tight monetary policy is over.

INTEREST RATES

Interest rates are likely to remain at these levels well into next year. Moreover, the ECB will continue to, and may even accelerate, the shrinking of its balance sheet.”

Inflation was projected at 3.2 percent next year, more than the 3.0 percent forecast three months ago, while growth projections were cut to 0.7 percent for this year and a mere 1.0 percent for 2024.

Growth prospects are fading quickly, partly due to higher interest rates, analysts warned.

Even services – “long the EU’s bright spot – have started to weaken, raising the risk the economy will slip into recession,” Reuters commented.

The ECB’s new economic projections reflect these shifts and could stoke fears of stagflation, where a period of economic stagnation is accompanied by high inflation.

Following the announcement, the euro quickly lost roughly all its gains towards the pound, and more pressure on the eurozone was expected.