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HomeE.U.The European Central Bank suspended rate hikes as Middle East tensions rise

The European Central Bank suspended rate hikes as Middle East tensions rise

The European Central Bank left rates unchanged on Thursday, marking a pause in its restrictive monetary policy after 10 increases since July 2022, Euronews reported.

For the first time in more than a year, the European Central Bank (ECB) has decided to leave interest rates unchanged as the war between Israel and Hamas casts a shadow over the already bleak outlook for the European economy.

The ECB held the meeting unchanged for the first time since 10 consecutive rate hikes began in July 2022, bringing the key rate to a record high of 4 per cent. The ECB will join the US Federal Reserve, the Bank of England and others holding borrowing costs steady, albeit at their highest in years, as inflation has fallen.

In October, inflation in Europe reached a marginal high of 10.6 per cent for the 20 countries using the euro currency as the war in Ukraine took its toll. Soaring prices poisoned consumer spending, draining household finances with additional costs for food, heat and electricity.

Analysts had predicted the ECB would refrain from raising rates further at its Athens meeting as inflation fell to 4.3 per cent. This is one of the ECB’s regular meetings outside its Frankfurt headquarters, designed to emphasise its status as an institution of the European Union.

According to BCA Research’s chief European strategist, Mathieu Savary, the ECB’s decision not to change interest rates is a sign that the central bank is “reassured” by the recent slowdown in inflation. He added:

“Nonetheless, inflation remains elevated enough that the [ECB’s] Governing Council could not let its guard down completely, especially in light of the ECB’s large balance sheet.”

Recently, there have been growing concerns about slowing economic growth and even the risk of recession. Raising interest rates is the central bank’s main weapon in the fight against inflation, but it can affect economic growth by increasing the cost of credit to buy consumer goods, especially housing, and for companies to purchase new equipment and facilities.

Purchasing managers surveyed by S&P Global see a slowdown in economic activity in October. Analysts at ABN Amro forecast economic output in the eurozone to fall by 0.1 per cent in the July-September quarter and minus 0.2 per cent in the final three months of the year. EU data for the third quarter will be released on Tuesday.

The impact of inflation on consumers has been one of the main reasons why Europe has seen virtually no growth this year, with zero growth in the first quarter and 0.2 per cent in the second quarter. The International Monetary Fund predicts Germany’s largest economy will contract by 0.5 per cent this year, making it the world’s worst performing large economy. Russia is expected to grow this year, according to the IMF.

Across Europe, there is little prospect for improvement this year. The war between Israel and Hamas introduces uncertainty as Europe is heavily dependent on energy imports, which could suffer if the war spreads to Iran or its proxy militants in Arab countries. Carsten Brzeski, global head of macro at ING bank, said:

 “The ECB won’t be in any rush to take further action. Instead, it will use a welcome pause to wait for more data points on the delayed impact of the rate hikes so far and developments in the oil price.”

The focus has shifted to how long rates will remain at record highs. ECB President Christine Lagarde reiterated the bank’s statement that rates “have reached levels that, if maintained for a sufficiently long time, will make a significant contribution to the timely return of inflation” to the economy’s optimal target of 2 per cent.

This was taken as a signal that the ECB is done raising rates, although some analysts do not rule out a final rate hike in December if the expected decline in inflation does not materialise.

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