Despite having experienced nine consecutive increases, the European Central Bank (ECB) hinted at the possibility of stopping the increase in interest rates in the coming months. The deposit rate, which serves as a reference for other rates, reached its highest historical level, standing at 3.75%, equaling the mark reached between October 2000 and May 2001. On the other hand, the refinancing rate was at 4.25%, while the marginal lending rate was set at 4.50%.
In relation to the measures adopted, the ECB opted to reduce to 0% the remuneration of a part of the mandatory reserves of the banks, which implies a decrease in the interest that must be paid for the reserves that still amount to several trillion euros. The institution explained that, although inflation continues to decline in 2023, it is expected to remain high for a prolonged period, especially as Russia withdraws from the agreement on the export of Ukrainian cereals through the Black Sea, which could boost prices.
However, the ECB opened up the possibility of pausing interest rate increases at its next meeting, depending on available economic data. Its president, Christine Lagarde, assured that it will depend on the economic data if an increase or a pause will be decided, making it clear that a decrease in rates is not contemplated in the next meetings. In June, inflation in the euro area fell back to 5.5% in one year, although it remains significantly above the 2% target set by the ECB.
Lagarde said the economic outlook for the eurozone has shown a deterioration, and some experts are expressing concerns about the high rate policy, warning that it could prolong the economic weakness the region is currently facing. The ECB aims to set its benchmark interest rates at sufficiently restrictive levels to ensure a return of inflation to 2%. Bank of the Netherlands Governor Klaas Knot said a further rate hike this year is a possibility but not a certainty.
Although the eurozone went through a mild recession last winter, the International Monetary Fund (IMF) projects an increase in the region’s Gross Domestic Product (GDP) of 0.9% in 2023, despite the decline in the German economy.