The European Central Bank has kept interest rates unchanged for the first time since June 2022 in a further sign that some of the world’s leading monetary authorities are close to ending the most aggressive tightening campaign in a generation.
Members of the ECB’s governing council elected to leave official borrowing costs across the 20 countries that use the euro at 4 per cent — still the highest level since the central bank was created in 1999.
Christine Lagarde, its president, and other members of the governing council decided to hold rates because their previous rate rises were already spreading “forcefully into financing conditions” and were “increasingly dampening demand”.
Lagarde, 67, said the eurozone economy was “weak” and would remain so “for the remainder of this year”. She said the ECB remained “attentive” to the fallout of the Israel-Hamas war on the European economy.
The central bank’s monetary policy statement repeated the line contained in an earlier communiqué that keeping the deposit rate at 4 per cent “will make a substantial contribution” to bringing inflation down to its 2 per cent target, reinforcing evidence that rates have peaked on the Continent.
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Claus Vistesen, at Pantheon Macroeconomics, the consultancy, said this cemented “the outlook for higher-for-longer, at least as the governing council sees it”.
A sharp reduction in eurozone inflation to 4.3 per cent from a peak of more than 10 per cent in October last year has weakened the case for further monetary policy tightening. Growth across the common currency bloc is very weak, with some of its largest economies, including Germany, close to recession.
However, the ECB indicated that it was still wary of lingering inflationary pressures, leaving the door open to further interest rate rises if price growth proves to be resilient.
The rapid increase in interest rates, a withdrawal of government pandemic support and suppressed consumer spending have squeezed eurozone economic growth. The ECB is worried that it could cause a needless recession by lifting the deposit rate too high.
The euro weakened by 0.3 per cent against the dollar after the rate announcement to $1.052. The pound was largely flat at $1.2117.
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Next Thursday, the Bank of England is expected to keep Britain’s base interest rate unchanged at 5.25 per cent.
