Supervisor Elham AbolFateh
Editor in Chief Mohamed Wadie

ECB Raises Rates to Highest Level since 1999

Fri 15 Sep 2023 | 05:04 AM
Taarek Refaat

The European Central Bank raised interest rates for the 10th time, continuing its boldest campaign to tighten monetary policy in the face of inflation in the euro zone.

The ECB increased interest rates by 25 basis points for the fourth time in a row, bringing the base refinancing rate to 4.5%, the marginal lending rate to 4.75%, and the borrowing rate to 4%, highest since 1999.

The European Central Bank stressed in its statement accompanying the decision that although inflation continues to decline, it is “expected to remain very high for a very long period.”

Consumer prices rose 5.3% year-on-year in the euro zone in August from a year earlier, settling 2.5 times higher than monetary policymakers' target, driven mainly by higher energy prices.

After today's interest increase, the European Central Bank said that it believes that key interest rates have reached levels that "if maintained for a sufficiently long period, will contribute significantly to the timely return of inflation to the target," stressing that future decisions will ensure that interest rates are determined. Home “at sufficiently restrictive levels for as long as necessary,” and stressed that it will continue to follow a data-driven approach to determining “the appropriate level and duration of restriction.”

It should be noted that the European Central Bank began its campaign to tighten its monetary policy in July 2022 without stopping, and raised interest rates from near zero to their current levels.

On the other hand, the Federal Reserve temporarily stopped raising interest rates once, at its meeting held last June, after 10 consecutive increases in borrowing rates.

On the other hand, the European Central Bank raised its average inflation expectations for the current and next years to 5.6% and 3.2%, respectively, to reflect a “higher path for energy prices,” while it reduced its expectations for 2025 to 2.1%.

Excluding food and energy prices, monetary policymakers lowered their average core inflation forecast to 5.1% in 2023, 2.9% in 2024, and 2.2% in 2025.

Today's decision by the European Central Bank reflects the insistence of financial policymakers in the eurozone to target inflation, at a time when the economies of countries in the eurozone are affected, especially Germany. The region's industrial output fell 1.1% in July, and the European Commission said this week that Germany would be the only major country to suffer a contraction this year.

Analysts expect the euro zone economy to grow 0.1% in the three months ending in September, but many analysts polled by Bloomberg expect GDP to contract.

In a parallel context, monetary policy makers at the European Central Bank have significantly reduced their economic growth expectations, and now expect the euro zone economy to grow 0.7% this year, 1% next year, and 1.5% in 2025.

This came after financing conditions became tighter and “demand became increasingly weak, and the impact of this tightening on domestic demand and the weak international trade environment is increasing,” according to what was stated in a statement by the European Central Bank.