Faced with the slowdown in the economy, the ECB stops increasing its interest rates

ECB President Christine Lagarde, in Athens, October 26, 2023.

After ten successive increases in interest rates, the European Central Bank (ECB) paused on Thursday October 26. For the first time since June 2022, its board of governors, which met in Athens, decided to keep interest rates unchanged, namely 4% for its deposit rate, which is the benchmark.

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The ECB recognizes that the eurozone economy is now ” weak “, largely as a result of rising interest rates. It is therefore urgent to wait. Because the whole question today is whether the ECB has not gone too far in its monetary tightening.

Without directly answering the question, Christine Lagarde, its president, recognizes that the euro zone economy is today close to stagnation: “The economy remains weak. Recent data suggests that industrial production has continued to decline. Soft international demand and tougher financial conditions are weighing on investment and consumer spending. The services sector continues to weaken. »

Give yourself time to observe

Conversely, inflation appears to be gradually slowing. The price increase was 4.3% in September (over twelve months) in the euro zone, very far from the peak of 10.6% reached in October 2022, although this remains above its target of 2%. “Most measures of underlying inflation continue to decline”adds Mme The guard. Inflation in goods is falling, but also in services, which has worried the ECB the most until now.

Under these conditions, the twenty-six governors decided, unanimously, to give themselves time to observe the situation. If the increase in interest rates, from -0.5% to 4% in fifteen months, is over, its effects have not yet been transmitted to the entire economy. Banks must first p these rates on to their customers, then they must gradually change their behavior: a company can, for example, give up investing if the rates are too high, a household decide to buy a home cheaper or postpone work…

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The first part of the transmission of monetary policy has now been completed: the banks have significantly increased the rates they offer. A company now borrows on average in the euro zone at 5%, and a real estate loan for an individual is at 3.9%. These rates were 1.6% each in January 2022.

As for the second part of the transmission of monetary policy – ​​from banks to the real economy – it is starting to be felt. In the third quarter, 45% of euro zone banks indicated a decline in household borrowing demand; the drop reached 36% for businesses. “These are levels that can indicate a recession”, estimates Jack Allen-Reynolds, of the firm Capital Economics. According to Mme Lagarde, this transmission of monetary policy should continue at least until the first quarter of 2024, without the ECB needing to act again.

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