Tight financing conditions are reducing demand and this is helping to reduce inflation, the ECB points out
The unanimity of the Board of Directors of the European Central Bank, that it is still premature to discuss a reduction in interest rates, was conveyed by the head of the Central Bank, Christine Lagarde, shortly after the decision to keep interest rates unchanged was made public.
The decision to keep interest rates unchanged as the latest broadly confirmed her previous (December) assessment of the medium-term outlook for inflation, the ECB president said during a press conference. Apart from the upward impact on inflation, which is due to energy, the downward trend in core inflation has continued and previous interest rate increases are still strongly transmitted to funding conditions. Tight financing conditions are reducing demand and this is helping to reduce inflation, the ECB points out.
After this, the three key ECB interest rates, i.e. the interest rate on the main refinancing operations and the interest rates on the marginal financing facility and the deposit acceptance facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively. As Christine Lagarde explained, the ECB expects that part of the wage increases, which have already taken place, will be absorbed by the reduction of the profit margin in goods.
However, there is relative uncertainty about how wages will develop in the Eurozone, as around 40% of Eurozone workers are set to sign new employment contracts in the coming months. Referring to the euro zone economy, Christine Lagarde estimated that it is likely to have stagnated in the last quarter of 2023, while the latest data show that the economy will remain weak in the near future. However, some preliminary indicators show that the economy will return to a positive growth rate.
Despite this, risks to economic growth remain elevated. Growth could be lower if the effects of monetary policy prove stronger than expected. A weaker global economy, or a further slowdown in the global economy, could adversely affect the pace of the eurozone’s recovery. Global trade will also affect the growth of the euro area. Russia’s unjustified war against Ukraine and the tragic conflicts in the Middle East are key sources of geopolitical risk. Consequently, this uncertainty could negatively affect businesses and households in their investment and consumption behavior respectively.
The labor market remained robust. The unemployment rate fell to 6.4% in November, falling to the lowest level since the start of the euro. At the same time, demand for labor is slowing, with fewer vacancies being advertised. According to Christine Lagarde, governments should continue to withdraw energy-related support measures to avoid the emergence of new inflationary pressures. Fiscal and structural policies should be designed to make the economy more productive and competitive, as well as gradually reduce high public debt ratios.
