26 October 2023
If you are covering the European Central Bank’s decision to hold interest rates at 4%, please find below a comment from Marcus Brookes, chief investment officer at Quilter Investors:
“Following the most aggressive series of rate hikes in its history, the European Central Bank has joined the Federal Reserve and Bank of England in hitting the pause button and assessing exactly what impact its actions are having to date. Eurozone inflation has come down significantly and is expected to moderate further, although it is still some way off target.
“It seems, however, that Christine Lagarde does believe that 4% is the ceiling for rates this time around and should help moderate inflation further, although much of that is out of their control. There remain several risks that may keep inflation stubbornly high including increasing wage growth and the uncertainty in the Middle East which is pushing up energy prices. Going forward, like other central banks it will say the market needs to expect higher interest rates for longer, with the door being left open should we see inflation spike again.
“However, given the stagnating economy and the fact other central banks have moved into a holding pattern, something very unexpected would need to happen for rates to be raised again. The pressure will quickly shift to cutting rates given the lack of economic growth. This is the problem facing central banks now. They have successfully guided economies to this level of rates without tipping them into full-blown recessions, although Germany is experiencing one and others will have felt like they were in one.
“So how long can rates really remain at this level before things really start to bite? If they move too early, they risk bringing inflation back into the system – but move too late and the economic impact will be significant.
“With geopolitical events flaring up, it isn’t very easy being a central banker right now.”
