ECB Maintains High Borrowing Costs to Control Inflation Amid Economic Difficulties
The European Central Bank (ECB), under the leadership of President Christine Lagarde, has reaffirmed its commitment to sustaining high borrowing costs, as necessary, to regulate consumer prices amidst challenging economic conditions. This pledge was made in Lagarde's address to the European Parliament on Monday.
The ECB's future decisions are geared towards maintaining key interest rates at restrictive levels for as long as required. The objective is to steer inflation back towards the 2% medium-term target promptly. This comes after the ECB raised its crucial policy rate to 4% this month, a move that marks the pinnacle of an over-year-long campaign to curb inflation. Economists and investors widely accept this rate as the campaign's peak.
Several members of the Governing Council, including Pablo Hernandez de Cos of Spain, have supported this stance. De Cos reiterated on Monday that preserving the current level should gradually guide price growth back towards the 2% goal. Contrarily, Francois Villeroy de Galhau, Governor of the Bank of France, hinted at his preference for not pushing rates any higher to avoid excessive strain on the economy.
However, some officials remain uncertain about whether this rate truly represents the peak. Joachim Nagel, President of Bundesbank, expressed last week that it was too early to make such assertions given that inflation remains high and is expected to decrease only slowly.
The significant challenge lies in assessing how the economy responds to the 450 basis points of monetary tightening implemented since July 2022. Recent times have witnessed a downturn in the euro-zone forecast, with Germany being particularly affected. Despite a slight uptick in business confidence in September, it continues to linger at historically low levels, according to data released by the Ifo Institute on Monday.
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