Background on the European Central Bank (ECB)
The European Central Bank (ECB) is the central bank responsible for monetary policy in the Eurozone, which consists of 19 European Union member states that have adopted the euro as their common currency. The ECB’s primary objective is to maintain price stability, which it defines as inflation below, but close to, 2%.
Current Economic Situation
According to a majority of economists surveyed by Reuters, the ECB will keep interest rates unchanged at least until 2027. This decision is based on the fact that inflation remains near the ECB’s target of 2%, and the economy is advancing steadily.
Inflation and Interest Rates
Although inflation ticked up slightly to 2.2% in the previous month from 2.0% in August, the minutes from the ECB’s meeting on September 10-11 suggest that their policy is “sufficiently solid” to manage any inflationary shocks. The ECB kept interest rates unchanged last month and offered a moderately optimistic outlook on the Eurozone’s economy.
ECB’s Deposit Facility Rate
The ECB has lowered its deposit facility rate by 20 basis points (bp) between June 2014 and June 2015. The rate will remain at 2.0% for the third consecutive meeting on October 30, according to 88 economists surveyed by Reuters between October 15 and 22.
- ECB’s Rate Expectations: 72% (63 out of 88) of economists expect the ECB’s deposit rate to remain unchanged this year, while 57% (45 out of 79) do not foresee any changes until the end of next year.
- Future Interest Rate Expectations: As of last month, slightly less than half anticipated that interest rates would remain unchanged by the end of 2026. Interest rate futures are slightly pricing in a 25 bp cut by the end of 2026.
Economist Perspectives
Shaan Raithatha, Senior Economist at Vanguard, stated: “The lack of moderation in recent economic activity and inflation data closes the window for another ‘preemptive’ rate cut by the ECB. We are eliminating what would have been our last expected rate cut and now predict that the official rate will remain at 2.0% until the end of 2026.”
Contrasting Expectations with the US Federal Reserve
This outlook contrasts with expectations of two more interest rate cuts by the US Federal Reserve (Fed) this year, where labor market weakness outweighs inflation risks, partly fueled by tariffs, according to another Reuters survey.
Managing Trade Barriers
Christine Lagarde, President of the ECB, stated on September 30 that the Eurozone is managing US trade barriers better than expected, keeping inflation risks “quite contained.”
Inflation and Growth Outlook
The median of surveys predicts that inflation will remain around 2% annually until 2027, with almost no change from the previous month. Growth prospects also remain stable due to hopes of fiscal spending, particularly from Germany, the Eurozone’s largest economy.
Key Questions and Answers
- Q: Why is the ECB keeping interest rates unchanged? A: The ECB is maintaining interest rates due to inflation being near its 2% target and a steadily advancing economy.
- Q: What is the current deposit facility rate set by the ECB? A: The ECB’s deposit facility rate is currently at 2.0%.
- Q: How do economists expect the ECB’s rates to change in the near future? A: Approximately 72% of economists surveyed by Reuters expect the ECB’s rates to remain unchanged this year, with 57% not anticipating any changes until the end of next year.
- Q: How does the ECB’s outlook compare to that of the US Federal Reserve? A: Unlike the Fed, which is expected to cut interest rates twice more this year, the ECB is maintaining its rates due to stable inflation and economic growth.
- Q: How is the Eurozone managing trade barriers imposed by the US? A: According to ECB President Christine Lagarde, the Eurozone is managing US trade barriers better than expected, which keeps inflation risks contained.
