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ECB leaves key interest rate unchanged at 4.5 percent

ECB leaves key interest rate unchanged at 4.5 percent

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ECB leaves key interest rate unchanged at 4.5 percent
ECB leaves key interest rate unchanged at 4.5 percent

ECB Maintains Key Rate at 4.5%, Anticipates Moderating Inflation

In a move that surprises none, the European Central Bank (ECB) has kept its main interest rate unchanged at a sky-high 4.5%. The short-term borrowing rate, known as the marginal lending rate, remains at 4.75% while the deposit rate, cherished by savers, remains steadfast at an all-time high of 4.0%.

While the ECB aims for an inflation rate of a mere 2%, the organization anticipates inflation in the eurozone to clock in at a whopping 5.4% for 2023 as a whole. However, they predict a more manageable 2.7% for 2024, a significant decrease from their expectations in September. This optimistic outlook is tempered by the fact that the inflation rate still hovers far above the 1.9% forecast for 2026, when the ECB's target would finally be met.

The ECB has hurled key interest rates skyward ten times in succession since July 2022 to counteract the rampant inflation. This halt in rate increases in October marked the first break in the relentless crusade against inflation.

The bankers' hawkish attitude towards interest rates has exerted a "hefty impact" on the economy, as the ECB noted in its latest communication. The central bank also revised its expectations for the Eurozone's economic growth this year and next, trimming them down to a somewhat dismal 0.6% and 0.8% respectively.

Digging Deeper:

  1. The key interest rate in Frankfurt, the seat of ECB's power, remains doggedly at 4.5%, barely swayed by the high inflation.
  2. The ECB has slashed its forecast for the Eurozone's inflation by nearly half for 2023, yet it still lags far behind its cherished 2% goal.
  3. Autumn's chilly winds may begin to paint the trees in Frankfurt a splendid kaleidoscope of colors, yet the pervasive inflation compels the ECB to maintain its tight grip on interest rates.
  4. The ECB confidently asserts that inflation will gradually wane, targeting a 2.7% rate in 2024, and reaching its desired 1.9% benchmark by 2026.
  5. Despite the Eurozone's persistent inflation of 4%, the ECB maintains vigilance, carefully monitoring the economic landscape, ready to tweak interest rates if circumstances warrant.

Additional Insights:

According to the ECB, the current inflation forecast for the Eurozone predicts a steady decline in inflation, with forecasts pointing to the ECB's 2% medium-term target being reached by January 2025. Key points include:

  1. Inflation Rate: The inflation rate in the Eurozone stood at 2.5% in January 2025, somewhat higher than in December, but on a downward trajectory.
  2. Core Inflation: Core inflation, which discards energy, food, alcohol, and tobacco prices, stood steady at 2.7% year over year.
  3. Energy Prices: After a minuscule 0.1% increase in December, energy price inflation surged up to 1.8% in January, contributing to overall inflation.
  4. Wage Growth: Expected wage growth plummeted in the latter half of the year, potentially alleviating domestic inflationary pressures.
  5. Interest Rate Outlook: The ECB reduced its key interest rate by 25 basis points to 2.75% in January 2025, and financial markets anticipate further rate cuts.
  6. Monetary Policy Approach: The ECB adheres to a data-driven, meeting-by-meeting policy, focusing on economic trends and monetary policy transmission.

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