ECB holds interest rates after 10 successive hikes

Inflation in the euro zone has fallen to 4.3% as of September from a record 10.6% last October, but is still running at more than double the ECB’s target

The European Central Bank (ECB) kept its interest rates unchanged on Thursday following a series of 10 consecutive hikes since July last year, amid growing signs that its efforts to fight inflation are having an impact.

The decision was widely anticipated by economists. Still the ECB warned that it will ensure that rates remain high “for as long as necessary” to bring down inflation to its target.

Inflation in the euro zone fell to 4.3 per cent September from 5.2 per cent in August and a record 10.6 per cent last October, but is still running at more than double the ECB’s 2 per cent target.

“Inflation is still expected to stay too high for too long, and domestic price pressures remain strong. At the same time inflation dropped markedly in September, including due to strong base effects, and most measures of underlying inflation have continued to ease,” ECB president Christine Lagarde said at a press conference in Athens, where the meeting took place. Base effects refer to inflation for the corresponding period last year.


“The governing council’s past interest rate increases continue to be transmitted forcefully into financing conditions. This is increasingly dampening demand and thereby helps push down inflation.”

The ECB governing council left its deposit rate at 4 per cent and its refinancing rate – which dictates borrowing rates, including for tracker mortgages – at 4.5 per cent. The deposit rate had stood at minus 0.5 per cent at the start of the cycle of rate increases.

Economists currently broadly expect that the ECB will not start to cut rates until at least the second half of next year. Ms Lagarde said that there was no discussion at the meeting on when rate reductions may start, adding that “now is not the time for forward guidance” on future monetary policy decisions, as the ECB continues to assess evolving data on inflation and how its previous rate decisions are being transmitted through the euro zone economy.

“Even having a discussion on cuts is totally, totally premature,” she said. “The fact that we are holding doesn’t mean to say that we will never hike again.”

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The pause will be welcomed by as many as an estimated 240,000 tracker mortgage holders who have seen their repayments spike over the last 15 months following more than a decade of ultra-low rates.

Central Bank of Ireland research has found Irish banks have lagged European peers in passing on official rate increases in the past 15 months to depositors and on variable and new fixed-rate mortgage loans, leaving savers essentially subsidising borrowers.

While the three remaining Irish banks have moved to increase fixed-term rates to as high as 3 per cent in recent months, 94 per cent of Irish household savings are in overnight accounts, earning little or nothing.

Central Bank of Ireland governor Gabriel Makhlouf said in September he wanted to see “much faster pass-through” of central bank rate increases to Irish borrowers and savers in order for commercial banks to play their role in the transmission of monetary policy to fight inflation.

“The ECB decision not to increase rates will be a relief to many mortgage holders, particularly those on tracker rates, but it shouldn’t be taken as a sign that rates are on the way down any time soon,” said Trevor Grant, chairman of the Association of Irish Mortgage Advisers.

The US Federal Reserve and Bank of England each paused its campaign of anti-inflation rate hikes last month, though none of the three major western central banks has ruled out further increases if necessary.

Ms Lagarde noted that while euro zone energy prices declined by 4.6 per cent in September, they have since spiked again as a result of the Israel-Hamas war.

The ECB president noted that the wider economy “remains weak” and that could be hit further if consumer confidence was affected by geopolitical tensions.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times