Status: 02/02/2023 2:15 p.m
In the euro zone, inflation has recently continued to fall. However, inflation is still a long way from the ECB’s two percent target. The monetary authorities have now raised the key interest rate to three percent.
In order to curb the high inflation in the euro area, the European Central Bank (ECB) decided to raise interest rates again. The key interest rate in the euro zone will rise by 0.5 percentage points to three percent, the currency watchdogs announced this today after their monetary policy meeting in Frankfurt.
It is the fifth rise in interest rates in a row. The central bank last hiked interest rates by 0.5 percentage points in December. The interest rate in the euro zone has thus risen to its highest level since the end of 2008.
Two percent target in sight
At the same time, inflation in the euro area eased further at the beginning of the year due to a lower rise in energy prices. According to an initial estimate by the statistics office Eurostat, consumer prices rose by 8.5 percent in January compared to the same month last year. This is the lowest inflation rate since May 2022.
The head of the ECB, Christine Lagarde, has repeatedly emphasized that inflation in Europe is still there “way to high”. In December, she said the ECB would raise interest rates “at a steady pace” until it was confident that inflation was heading back towards its 2% target.
Are more interest rate hikes imminent?
This requirement is now proving to be a source of contention within the Governing Council. Especially since the so-called core inflation, in which the volatile energy, food, alcohol and tobacco prices are deducted, stagnated in January at the high level of the previous month of 5.2 percent.
Political hawks who advocate higher interest rates – such as Klaas Knot of the Netherlands, Peter Kazimir of Slovakia and Bostjan Vasle of Slovenia – have specifically called for further rate hikes of 50 basis points each in February and March. Doves like Greek Yannis Stournaras and Italian Executive Board member Fabio Panetta, on the other hand, advocate smaller steps or at least the ECB not making any commitments for March.
Those tensions could lead to a compromise, as happened in December, when the ECB made the size of its next rate hike dependent on incoming data, analysts said.
What does the market expect?
Financial markets expect the ECB’s deposit rate to peak at 3.5 percent by summer, which would mark its highest level since the turn of the century.
“We suspect the ECB will reiterate its hawkish message in February as there are still uncertainties surrounding underlying inflationary pressures and a change in tone would undermine the ECB’s credibility “Said Annalisa Piazza, an analyst at MFS Investment Management.
Natixis’ Dirk Schumacher said that both the Federal Reserve (Fed) and the Bank of England are now effectively at a point of “fine tuning”, while the ECB has started raising rates later and is therefore way too far have to do.
Still a long way from the two percent inflation target: ECB President Christine Lagarde
economy more resilient?
According to the theory, tight monetary policy increases the risk that central banks will slow down the economy so much that it stalls. Recently, however, the economy in the euro zone has been stronger than expected. “It is likely that the ECB, emboldened by the resilience of the eurozone economy, will overlook the energy-driven fall in headline inflation and fully focus on underlying inflationary pressures,” said UniCredit, which also expects signals of a 50 basis point rate hike in March .
The Eurozone has unexpectedly experienced modest growth in the last three months of 2022, but this is largely due to an exceptionally mild winter and Ireland’s performance. An ECB survey found that banks were cutting access to credit at the most since the 2011 debt crisis — usually a harbinger of slower growth and falling inflation.
Rate hikes in UK and US
The ECB is following the monetary policy decisions in Great Britain and the USA with its interest rate hike. The Bank of England raised interest rates by half a point to four percent today. The central bank is thus driving the key interest rate up further. The British monetary authorities are under pressure to act in view of the persistently high inflation of 10.5 percent recently.
The Fed raised interest rates by 0.25 percentage points yesterday. The eighth increase in a row means the smallest step since March. The key interest rate is now in the range of 4.5 to 4.75 percent.
However, the American central bankers have clearly slowed down the rate hikes. In the USA, inflation had recently also weakened significantly. In December, consumer prices rose by 6.5 percent compared to the same month last year. In November it was still 7.1 percent. It was the sixth consecutive drop in inflation.
However, Powell promised further rate hikes. It is too early to announce “victory” in the fight against high consumer prices. “We think there’s still a lot to do.” However, the statements by Fed Chair Jerome Powell yesterday would have seemed less “hawkish”, Commerzbank said in the morning on the US interest rate decision.