ECB decides on monetary policy

Economic situation - ECB decides on monetary policy

Following an interest rate pause by the US Federal Reserve, the European Central Bank (ECB) is not expected to raise interest rates any further due to falling inflation. The euro currency guardians will announce their decision today.

The Federal Reserve had previously left the key interest rate unchanged at between 5.25 percent and 5.50 percent on Wednesday. At the same time, the central bank of the world's largest economy hinted at interest rate cuts in the coming year.

Rapid series of interest rate hikes

The Fed's decision-makers now expect an average key interest rate of 4.6 percent for the coming year. This indicates around three interest rate cuts in 2024. The high inflation rate in the US has fallen in recent months. Now Fed Chairman Jerome Powell and his colleagues want to see whether the current level is sufficient to keep high consumer prices in check in the long term. However, Powell warned that the battle against the high rate of inflation has not yet been won. The key interest rate in the USA is currently in the range of 5.25 to 5.5 percent. This is the highest level in more than two decades and the third time in a row that the Fed has paused interest rates.

Like the Fed, the ECB has also attempted to combat rising inflation with a rapid series of interest rate hikes. The ECB did not raise interest rates any further in October. The key interest rate at which commercial banks can obtain fresh money from the central bank is currently 4.5 percent. Higher interest rates make loans more expensive, which can curb demand and counteract high inflation rates. However, more expensive loans are also a burden on the economy because credit-financed investments become more expensive.

Growing concerns about the economy

Many economists now expect that interest rates will not be raised further for the second time in a row. The ECB and the Fed are aiming for stable prices in the medium term with an inflation rate of 2.0%. Inflation in the eurozone continued to weaken significantly in November. According to Eurostat, the statistics office, consumer prices were 2.4% higher than in the same month last year, compared to 2.9% in October. Last year, the inflation rate was still in double figures at times as a result of the Russian war of aggression against Ukraine.

At the same time, concerns about the economy are growing. In the third quarter, economic output in the eurozone shrank by 0.1% compared to the previous quarter. In the second quarter, gross domestic product (GDP) grew by 0.2% after stagnating at the beginning of the year. According to the German government and economists, the German economy will also shrink slightly in 2023 as a whole.

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1. Despite the Federal Reserve System in the USA pausing interest rates, the European Central Bank (ECB) is not anticipated to follow suit due to decreasing inflation in Europe.
2. The Fed, being the central bank of the USA, left the key interest rate unchanged at 5.25% to 5.50% earlier, hinting at possible interest rate reductions in 2024.
3. The ECB, similar to the Fed, has implemented rapid series of interest rate hikes to combat rising inflation, with the current key interest rate at 4.5%.
4. The Fed, under Chair Jerome Powell, aims to maintain inflation control with the current interest rate level, as a decisive victory against high consumer prices has not yet been accomplished.
5. In Frankfurt on the Main, the ECB is set to announce its decision on monetary policy today, with many economists predicting no further interest rate increases due to economic concerns.
6. The Fed's decision to pause interest rates marks the third instance in a row, reflecting a shift in monetary policy aimed at maintaining economic stability and controlling inflation.
7. The ECB and the Fed seek to maintain stable prices, targeting an inflation rate of 2.0%, while European and US economies face growing concerns about stagnant growth.
8. The US Federal Reserve System, as the country's central bank, plays a crucial role in formulating monetary policy, setting interest rates, and managing the nation's economic situation, among other functions.

Source: www.stern.de