The ECB seems to be putting the “brake” on after today’s -tenth in a row- increase in interest rates. After the new increase of 0.25%, the key deposit rate of the ECB stands at 4% and that for the main refinancing operations at 4.5%.

As ECB President Christine Lagarde stated, changing the rhetoric she had used in the recent past, “the ECB’s key interest rates are now set at levels which, if sustained for a sufficiently long period of time, will make a significant contribution to the timely return of inflation to the target”.

It is indicative that following the ECB’s announcement, ING in its analysis entitled “ECB announces final rate hike”, points out that “…higher inflation and inflation expectations look like the main drivers of the increase. The ECB announcement is clear: today was the last hike in the current cycle.”

Regarding the next steps on the interest rate front, the head of the ECB explained that the future decisions of the Governing Council will ensure that the ECB’s key interest rates will be set at sufficiently restrictive levels for as long as necessary. The Governing Council will continue to take an evidence-based approach to determining the appropriate level and duration of accommodative monetary policy. In particular, the Governing Council’s decisions on policy rates will continue to be based on its assessment of the outlook for inflation in light of incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. policy.

Today’s decision by the Board of Directors, as stated in the relevant announcement, reflects the Board’s assessment of the outlook for inflation despite the significant deterioration in the growth outlook of the economy. Specifically, the ECB’s September macroeconomic forecasts for the euro area raise average inflation to 5.6% in 2023 (from 5.4% forecast by ECB economists in June), to 3.2% in 2024 (from 3 % which was in June) and 2.1% (2.2% in June) in 2025. This is an upward revision for 2023 and 2024 and downward for 2025. The upward revision and 2024 mainly reflects a higher path for energy prices. Underlying price pressures remain high, although most indices have started to ease.

In terms of its economic growth forecasts, the ECB now estimates that the euro area economy will grow by 0.7% in 2023 (from 0.9%), by 1.0% (from 1.5%) in 2024 and 1.5% (from 1.6%) in 2025. More specifically, the economy is likely to remain subdued in the coming months as lower demand for euro area exports and the impact of tight financing conditions limit growth, including through lower investment in housing and businesses. The services sector, so far resilient, is now also weakening. Over time, economic momentum is expected to strengthen as real incomes are expected to rise, supported by falling inflation, rising wages and a strong labor market, and this will support consumer spending.

The ECB is asking member states’ governments to withdraw emergency measures they had put in place when the energy crisis broke out, as it is now starting to subside. This, the Central Bank explains, is necessary to avoid an increase in medium-term inflationary pressures, which would otherwise require an even stronger monetary policy response. Fiscal policies should be designed to make the economy more productive and gradually reduce high public debt.

Referring to developments in the financial sector, Christine Lagarde reported that loans to businesses increased at an annual rate of 2.2% in July, while loans to households also increased, less strongly, by 1.3%, after 1, 7% in June. In annualized terms based on the latest quarter’s figures, household loans fell by 0.8%, the biggest contraction since the start of the euro.