Frankfurt:The European Central Bank (ECB) decided on Thursday to maintain its interest rates despite increasing inflation pressures resulting from the energy shock associated with the Iran war. This decision follows the announcement by ECB President Christine Lagarde that she will step down early.
According to Bangladesh Sangbad Sangstha, the ECB left its benchmark rate unchanged at 2.5 percent, aligning with economists' expectations. The central bank, representing the 21 nations using the euro, has already increased the rate twice this year. The ECB is attempting to balance curbing inflation, which reached a three-year high of 3.8 percent in September, against exerting too much pressure on the eurozone economy.
The post-decision press conference is anticipated to focus on France's deteriorating public finances, as the country's bond yields have surged to their highest levels since 2002. Although France was not directly mentioned in the ECB's statement, it highlighted that financing conditions have tightened since the last governing council meeting in September, likely affecting inflation and growth.
The ECB noted that energy prices continue to rise due to the ongoing Middle East conflict, but underlying inflation remains stable, and wages have not significantly responded. The council acknowledged that the energy shock's magnitude and duration are expected to drive up inflation and lower growth. The ECB remains confident in its ability to manage the current uncertainty.
Lagarde's decision to step down in February, ahead of the official end of her term in October 2027, will allow European leaders to choose her successor before France's presidential elections. Officials are concerned that a far-right victory could complicate negotiations. Lagarde is expected to face questions about her future plans and potential successors during her press address.
France's increasing debt issues have led to speculation about whether the ECB might employ the Transmission Protection Instrument (TPI), designed to counteract moves in sovereign debt markets that could hinder monetary policy. However, the TPI activation criteria are stringent, and many believe France's situation does not meet the threshold. Lagarde has been hesitant about deploying the TPI, emphasizing that France's fiscal policies should address its rising yields.
Investors are also watching for any indications from Lagarde that the rising cost of government borrowing could reduce the likelihood of future ECB rate increases. As higher government borrowing costs typically lead to increased household borrowing costs, this could relieve the ECB from raising rates to control inflation. Economists anticipate the ECB's final hike of its current tightening cycle may occur in December, with updated growth and inflation forecasts expected.
Source Bangladesh Sangbad Sangstha