The ECB pauses interest rates at 4.5% after more than a year of constant increases that have taken them to historical highs
The European Central Bank (ECB) decided this Thursday to keep euro interest rates stable in what represents the first pause in monetary policy since the increases began in July 2022.. It has taken a year and two months, in which ten decisive meetings have been held, for the ECB to have given itself a pause to observe the effects of its actions. A break to reflect that will not have immediate effects on the Euribor. In October, variable mortgages will continue to be revised upwards and, barring a major surprise, this trend will continue well into 2024.
In this period, rates have gone from being negative to reaching unprecedented levels in the short history of the euro in record time. After the pause, the deposit facility – the interest that banks must pay the ECB for depositing funds on their balance sheet – stands at 4%. While the main refinancing rate – the one that most affects the evolution of the Euribor – remains at 4.5%.
The ECB's action has dragged down the entire eurozone economy, which has seen the costs of obtaining financing skyrocket, as has the burden borne by indebted households and companies.. Banks have turned off the credit tap and their profits have skyrocketed as the interest on the loans they have in their portfolio has revalued.
The around four million households with variable rate mortgages in Spain know this well.. The increases in official rates have catapulted the Euribor – the index with which the quota of the vast majority of variable loans in Spain is reviewed – to unprecedented highs in 13 years. So far in October, the average of this one-year indicator is close to 4.2%. Families have had to buckle up to be able to face mortgage reviews that have caused increases of more than 40% in the monthly payment of the most recent loans.
At this Thursday's press conference, the president of the ECB, Christine Lagarde, avoided commenting on whether interest rates have peaked, although she did make it clear that talking about lowering rates is “totally premature.” Thus, he has defended that the institution will continue to be guided by incoming data and make its monetary policy decisions meeting by meeting based on the three criteria applied by the ECB regarding inflation prospects, underlying inflation and the solidity of the transmission of its monetary policy in order to return to an inflation rate of 2% in the medium term.
With the pause now agreed, the ECB follows in the footsteps of the US Federal Reserve, which already declared its first pause last June. It would then raise rates again at its meeting in July, and then pause again in September.. Of course, it is not ruled out that the US central bank undertakes a final increase before the end of the year.
Inflation too high for too long
The central bank has justified its decision to freeze the rates at which its inflation forecasts have remained stable, while eurozone prices have slowed in September. The transmission of rate increases is increasingly noticeable in the economy and has managed to reduce demand, reflects the ECB.
The organization chaired by Christine Lagarde has insisted on the message it already launched in September to pave the way for a pause. Interest rates are already at levels that, if maintained long enough, will make a “substantial contribution” to bringing inflation to the 2% target.
However, the battle against price increases is by no means won. “Inflation is expected to remain too high for too long and domestic pressures on prices remain strong,” the ECB points out in the note through which it communicated the pause.
After the pause, the focus of the debate now moves to how long the official price of money will remain at the levels to which the ECB has taken it.. In this sense, the next meeting, which will be held in December, will be crucial. In it, the central bank will present growth and inflation projections and there may be more certainty about oil price expectations, a key element in the equation.