FRANKFURT, Germany (AP) — The European Central Bank kept its key interest rate at a record high Thursday and said it will keep them there as long as needed to battle back inflation, signaling little as expectations grow that it will start cutting borrowing costs next year to support the shrinking economy.
It follows similar decisions this week by the U.S. Federal Reserve, Bank of England and Swiss National Bank to leave rates unchanged. The Fed also signaled it could make three interest rate cuts next year.
The ECB gave away little about its future moves in a statement after keeping its benchmark rate at 4% but noted that inflation was “likely to pick up again temporarily in the near term.”
In a signal that cuts may not be around the corner, bank President Christine Lagarde said future decisions will ensure that rates “will be set at sufficiently restrictive levels for as long as necessary.” She spoke hoarsely at a news conferences, saying she was recovering from COVID-19 but was no longer contagious.
Central banks worldwide drastically raised rates to contain inflation that broke out in the wake of the COVID-19 pandemic and Russia’s invasion of Ukraine. They’re now trying to balance keeping rates high for long enough to ensure inflation is contained against the risk that higher borrowing costs could throw their economies into recession.
Inflation has fallen more than expected in the 20 European Union countries that use the euro currency, to 2.4% in November from a peak of 10.6% in October 2022. That’s not too far from the ECB’s goal of 2% considered best for the economy.
That has led analysts to predict the ECB will cut rates next year, though the timing is not certain and forecasts range from March to September for the move. The bank said it will make decisions based on the latest information about how the economy is doing.
While inflation is down following a record pace of rate hikes, economic growth has lagged because the cost of borrowing has surged for things like home purchases and business investment in new offices and factory equipment. The eurozone saw economic output shrink 0.1% in the July-to-September quarter.
Meanwhile, wages are still catching up to higher prices in shops, leaving European consumers less than euphoric even as European city centers deck themselves in Christmas lights.
In Paris, travel agent Amel Zemani says Christmas shopping will have to wait for the post-holiday sales.
“I can’t go shopping this year, I can’t afford Christmas gifts for the kids," she said. “What do they want? They want sneakers. I’m waiting for the sales to give them the gifts then. And they understand.”
Steven Ekerovich, an American photographer living in the French capital, said that while "Paris was lagging easily 50% behind the rest of the major cosmopolitan cities in pricing, it’s catching up fast. Rents, food, clothing. So, you have got to be careful now.”
Europe's falling inflation and economic stagnation mean the ECB may be the first major central bank to pivot to rate cuts, said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.
But the expectations vary, from Deutsche Bank’s prediction that March is a possibility to Pictet’s view that June is most likely.
Expectations of a March rate cut may be “excessive euphoria,” said Holger Schmieding, chief economist at Berenberg bank, cautioning that inflation could rise again before falling further. He doesn't see a rate cut before September.
Higher interest rates combat inflation by increasing the cost of borrowing throughout the economy, from bank loans and lines of credit for businesses to mortgages and credit cards. That makes it more expensive to borrow to buy things or invest, lowering demand for goods and easing prices.
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AP video journalist Alex Turnbull in Paris contributed.
David Mchugh, The Associated Press
