Geneva — The European Central Bank (ECB) has surprised markets by announcing its 10th consecutive interest rate increase, signaling its commitment to addressing persistently high inflation and its concerns about a potential economic slowdown. While some analysts expected a pause in the rate-hiking campaign, the ECB's decision underscores the central bank's determination to combat inflationary pressures.
Inflation Concerns Persist
The ECB's move comes as inflation in the euro area remained elevated, with a 5.3% annual rate in August, unchanged from the previous month. Even though the core inflation measure, which excludes volatile items like food and energy, eased to 5.3%, the ECB emphasized that inflation is expected to stay uncomfortably high for an extended period.
"Inflation continues to decline but is still expected to remain too high for too long," the ECB stated in its announcement.
Projections and Economic Growth
Accompanying the rate decision were new projections from European central bankers, which revealed their anticipation of firmer inflation than previously estimated. The ECB now projects an average inflation rate of 5.6% for this year and 3.2% in 2024. These figures are higher than the June estimates, primarily driven by "a higher path for energy prices." When excluding energy and food, inflation forecasts were adjusted downward.
However, the ECB also expressed concerns about economic growth, citing the impact of higher interest rates and a weakening international trade environment. The euro zone's growth projections were revised downward, with expectations of only 0.7% growth for this year and 1% in 2024.
Highest Levels on Record
Thursday's rate hike brings key interest rates across the eurozone to the highest levels on record. Although economic activity has already slowed in several eurozone economies, including Germany, the ECB indicated that these rates could contribute significantly to a timely return of inflation to its target.
The ECB stated that they would continue to assess economic data to determine the appropriate level and duration of restrictive policy. While another rate increase was not ruled out, the central bank signaled its willingness to adapt its approach as the economic landscape evolves.
This decision by the ECB reflects its commitment to addressing inflationary pressures and maintaining stability in the eurozone's economy. It also underscores the ECB's proactive stance in managing economic challenges amid a complex global environment.