14 September 2023
If you are covering the European Central Bank’s decision to raise interest rates by 0.25%, please find below a comment from Richard Carter, head of fixed interest research at Quilter Cheviot:
“The European Central Bank has, it appears, decided that 4% is the level it feels comfortable with allowing interest rates to climb to and help bring inflation down. Many market participants expected it to hold today and move into a wait and see pattern with the data, but it clearly sees the need to hike once more now before joining the Federal Reserve in an extended pause. Given where inflation is across the Eurozone, it is perhaps not a surprise it has chosen to once again raise rates. Inflation is not expected to return to target until 2025 and as such the ECB will be looking to put enough pressure on the economy, businesses and consumers to dampen demand.
“However, this puts the ECB in a similar bind to the Bank of England. Growth is faltering in Europe, and with concerns mounting about the state of the global economy, more interest rate rises could tip the balance and bring along a prolonged period of economic stagnation. While this would help bring inflation down, the ECB won’t want to see a sharp contraction in economic output, and thus must tread carefully.
“Expectations that the Federal Reserve would pause and the rest would follow may need to be put on hold for now. This new era of diverging monetary policy has a while to last yet.”
