Euro Area: ECB delivers its tenth consecutive rate hike in September

Euro Area Monetary Policy September 2023

Euro Area: ECB delivers its tenth consecutive rate hike in September

At its 14 September meeting, the European Central Bank (ECB) hiked the main refinancing operations rate, the marginal lending facility and the deposit facility rates by 25 basis points to 4.50%, 4.75% and 4.00%, respectively. The decision, which was expected by most market analysts, delivered the tenth consecutive hike and brought the cumulative increase since July 2022 to 450 basis points. That said, the decision was not unanimous but supported by a “solid majority” of policymakers, as “some” members voted to stand pat in view of the Eurozone’s current economic weakness.

The decision to continue hiking was underpinned by expectations that inflation, even if on a downtrend, would remain above target for an extended period. Moreover, underlying inflation remains too high. August saw headline inflation steady at July’s 5.3% and inflation excluding energy and food dropping only to 5.3% from 5.5%. Against this backdrop, the ECB stated that inflation “is still expected to remain too high for too long”.

In its updated outlook, the Bank now sees headline inflation averaging 5.6% in 2023 (previous forecast: 5.4%), 3.2% next year (previous forecast: 3.0%) and 2.1% in 2025 (previous forecast: 2.2%). As for growth, the monetary institution expects GDP to expand 0.7%, 1.0% and 1.5% in 2023, 2024 and 2025, respectively (previous forecast: +0.9%; +1.5% and +1.6%). Despite the worsening growth projections, the ECB decided to continue its tightening cycle, most likely as it expects current economic weakness to be only temporary.

The Bank kept the door open to further hikes but also suggested the possibility that the tightening cycle had come to an end. It stated that 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 [2.0%] target.” To this end, the Bank reiterated that it was “ready to adjust all of its instruments within its mandate”. That said, in the accompanying press conference, President Lagarde clarified that the board “will continue to follow a data-dependent approach”.

The next meeting is scheduled for 26 October.

Commenting on the ECB’s decision, Carsten Brzeski, global head of macro at ING, noted:

“Looking ahead, the ECB would be crazy to completely rule out further rate hikes. Inflation has simply taken too many unexpected turns, and the ECB has been wrong too often in the past. This is why today’s meeting still leaves the possibility of picking up hiking at a future stage. However, such a scenario is highly unlikely. A further weakening of the economy and more traction in a disinflationary trend will make it very hard to find arguments for additional rate hikes any time soon.”

This view is shared by Lee Sue Ann, economist at UOB, who stated:

“While we believe the door to future rate hikes remains open, we prefer keeping to our view of a pause in the current tightening cycle, implying terminal rates of 4.50%, 4.75% and 4.00% for main refinancing operations, the marginal lending facility and the deposit facility, respectively.”

Free sample report

Access essential information in the shortest time possible. FocusEconomics provide hundreds of consensus forecast reports from the most reputable economic research authorities in the world.
Close Left Media Arrows Left Media Circles Right Media Arrows Right Media Circles Arrow Quote Wave Address Email Telephone Man in front of screen with line chart Document with bar chart and magnifying glass Application window with bar chart Target with arrow Line Chart Stopwatch Globe with arrows Document with bar chart in front of screen Bar chart with magnifying glass and dollar sign Lightbulb Document with bookmark Laptop with download icon Calendar Icon Nav Menu Arrow Arrow Right Long Icon Arrow Right Icon Chevron Right Icon Chevron Left Icon Briefcase Icon Linkedin In Icon Full Linkedin Icon Filter Facebook Linkedin Twitter Pinterest