Inflation in the euro zone witnessed a decrease, dropping to 4.3% as of September from a historic high of 10.6% in October of the previous year. However, it still remains more than twice the European Central Bank’s (ECB) target.
On Thursday, the European Central Bank (ECB) decided to keep its interest rates unchanged, marking a notable shift after implementing 10 consecutive rate hikes starting from July of the previous year. This decision comes amid mounting indications that the ECB’s strategies to combat inflation are beginning to yield results.
The move was widely anticipated by economists, but the ECB accompanied the decision with a warning. They stated their commitment to “maintain policy rates at sufficiently restrictive levels for as long as necessary” to bring inflation down to their specified target.
In September, inflation in the euro zone fell to 4.3%, down from 5.2% in August and the record-high 10.6% of October the previous year. Nevertheless, it remains well above the ECB’s 2% target.
The ECB articulated, “Inflation is still expected to stay elevated for a prolonged period, and domestic price pressures remain robust. However, inflation decreased notably in September, partly due to strong base effects, and most indicators of underlying inflation have continued to ease.” “Base effects” refer to inflation levels during the corresponding period of the previous year.
The ECB further elaborated, “The governing council’s previous interest rate increases are still having a significant impact on financial conditions. This is increasingly curbing demand and, as a result, contributing to the reduction of inflation.”
This meeting was held in Athens, marking the first time in over a decade that the ECB governing council gathered there. The council decided to maintain the deposit rate at 4% and the refinancing rate, which influences borrowing rates, including those for tracker mortgages, at 4.5%. The deposit rate had commenced the cycle of rate increases at -0.5%.
The pause in rate hikes will be a relief to approximately 240,000 tracker mortgage holders who have seen their repayments soar over the past 15 months, following more than a decade of exceptionally low rates. Research conducted by the Central Bank of Ireland revealed that Irish banks have been slower than their European counterparts in passing on official rate hikes to depositors, variable-rate mortgage holders, and those with new fixed-rate mortgage loans, essentially leaving savers to subsidize borrowers.
While the three remaining Irish banks have recently raised fixed-term rates to as high as 3%, 94% of Irish household savings remain in overnight accounts, yielding minimal returns.
Gabriel Makhlouf, the Governor of the Central Bank of Ireland, expressed his desire for a “much faster pass-through” of central bank rate hikes to both Irish borrowers and savers. He emphasized the need for commercial banks to play their part in transmitting monetary policy to combat inflation.
Trevor Grant, Chairman of the Association of Irish Mortgage Advisers, noted, “The ECB’s decision not to raise rates will provide relief to many mortgage holders, especially those on tracker rates. However, it should not be interpreted as a sign that rates will decrease anytime soon.”
Economists currently expect that the ECB will not consider rate cuts until at least the second half of the following year. In a parallel move, the US Federal Reserve and the Bank of England halted their anti-inflation rate hike campaigns last month.
The ECB clarified its approach, stating, “The governing council will continue to adopt a data-dependent approach in determining the appropriate level and duration of restriction. Interest rate decisions by the governing council will be based on assessments of the inflation outlook, considering economic and financial data, underlying inflation trends, and the effectiveness of monetary policy transmission.”