The European Central Bank decided to keep its key policy rate unchanged at 4.00 percent.
European the central bank (EKP) announces that it will stop the tightening of monetary policy. The decision to keep key interest rates unchanged corresponds to the expectations of the financial markets.
The monetary policy-making council justifies its decision by the fact that the increase in consumer prices, i.e. inflation, has slowed significantly in the euro area, although it is still too fast and price pressures are strong.
“Nevertheless, inflation slowed considerably in September, which was also partly due to the strong effects of the comparison period, and according to most indicators, core inflation has also continued to moderate. The effect of the ECB Council’s previous rate hikes continues to have a strong effect on financial conditions. This dampens demand more and more and thus helps to slow down inflation,” says the council in its decision.
Council according to the estimate, two percent inflation is achievable if the key interest rates are kept at their current level for a long enough time. In other words, interest rate cuts are not expected for some time yet.
Within a year and a half, the European Central Bank has tightened monetary policy ten times in a row. Last fall, it resorted twice to exceptionally large interest rate increases of 0.75 percentage points.
The key interest rate, i.e. the deposit rate of commercial banks, has never before been as high as it is today.
Fast inflation is harmful to both households and businesses.
It usually causes the most problems for the poor, whose income is largely spent on necessities.
By tightening monetary policy, the central bank reduces demand so that it is better balanced with supply. This leads to a slowdown in inflation over time.
The International Monetary Fund (IMF) predicts that the euro area economy will grow by 0.7 percent this year and 1.2 percent next year. Last year, the economy grew by 3.3 percent.
One significant reason for the noticeable slowdown in economic growth is the tightening of monetary policy. Based on the purchasing managers’ index, which reliably predicts economic growth, the euro area is still at risk of falling into recession.
IMF estimates that inflation in the euro area will slow down to 5.6 percent this year and 3.3 percent next year. Last year, consumer prices rose by 8.4 percent in the euro area.
According to the central bank’s price stability objective, inflation should be two percent in the medium term. By suspending interest rate hikes, the central bank moves to monitor the extent to which the already made interest rate hikes slow down inflation.
Interest rate hikes usually start to slow down the rate of inflation after six months and typically reach their full effect over a year.
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