Because of the war in Ukraine, the ECB kept raising interest rates. Inflation is now slowly weakening and the key interest rate should no longer be raised. But now another problem is worrying the monetary authorities.
After ten interest rate increases in a row, the euro currency watchdogs are leaving interest rates unchanged for the time being. The key interest rate remains at 4.5 percent, as the European Central Bank announced after an external meeting of the ECB Council in Athens. Many economists had expected that the central bank would initially not raise interest rates any further. Inflation in the euro area had recently fallen. At the same time, concerns about the economy are growing.
“Based on its current assessment, the Governing Council of the ECB is of the opinion that the key ECB interest rates are at a level which, if maintained for long enough, will make a significant contribution to this objective,” the ECB said.
Inflation is expected to be 2.0 percent in the medium term
Last year, inflation was at times in double digits as a result of Russia’s war of aggression against Ukraine. Since July 2022, the ECB has been countering this development with an unprecedented series of interest rate increases. Higher interest rates make loans more expensive, which can slow down demand and counteract high inflation rates. More expensive loans are also a burden for the economy because loan-financed investments become more expensive.
The ECB is aiming for stable prices in the medium term with an inflation rate of 2.0 percent. Inflation in the common currency area weakened significantly in September. The annual inflation rate fell to 4.3 percent from 5.2 percent in August.
Economic prospects clouded
At the same time, the economic outlook for the euro area has deteriorated. The ECB recently expected an increase in gross domestic product of 0.7 percent this year. In July, an increase of 0.9 percent was predicted. According to estimates by the federal government and many economists, Europe’s largest economy, Germany, will even shrink slightly this year.
According to the most recent decision by the ECB Council, the key interest rate at which banks can obtain fresh money from the central bank remains at 4.5 percent. The deposit interest rate that banks receive for parked funds remains at 4.0 percent. This is the highest level since the monetary union was founded in 1999.