The ECB extends the status quo on key rates, Christine Lagarde warns that we must “not let our guard down” in the face of inflation

Following in the footsteps of other major central banks, the European Central Bank (ECB) extended the status quo on its key rates on Thursday, December 14. Its president, Christine Lagarde, however, tempered expectations of a rate cut, warning that we should “not let our guard down” despite the sharp decline in inflation in the euro zone.

The main key rate remunerating deposits, the benchmark for credit in the euro zone, was thus maintained at its historically high level of 4%, which it had reached in September. While the cycle of drastic rate increases seems to be coming to an end for the main monetary institutions, the question now arises of the moment which will be chosen to ease the constraint.

Ms. Lagarde assured the press that the governing council had “not discussed rate cuts at all” during its monetary policy meeting on Thursday. She notably mentioned inflationary risks linked to “wages”, “geopolitical risks” and “extreme weather events” which could push prices up.

A forecast price increase of 2.7% in 2024

“The slowdown in underlying inflation [excluding volatile energy and commodity prices] has continued” since October, but “price pressures remain sustained, mainly due to dynamic cost growth labor units”, underlines the institution in its press release.

The ECB no longer believes, however, that inflation will “always remain too high for too long a period” with regard to its objective of 2%, according to the formula which has been repeated since September 2022. The press release of monetary policy decisions does not however, does not provide any indication of a future relaxation of rates.

Quicker to foresee such a reversal, the American central bank (Fed) “discussed a timetable for rate cuts” on Wednesday, declared its president, Jerome Powell, after leaving its rates unchanged for the third time in a row .

Inflation led the ECB to ten consecutive rate hikes since July 2022, until a first pause took effect in October. This price increase in the euro zone has been divided by more than four since the record of 10.6% reached in October 2022, when the effects of the war in Ukraine on gas and oil prices were felt in full force.

In its new forecasts, unveiled on Thursday, the monetary institute predicts a price increase of 2.7% in 2024, compared to 3.2% previously, then 2.1% in 2025 and 1.9% in 2026. Growth projections were also revised downwards for 2024, to 0.8% in 2024, compared to 1% in September, then set at 1.5% in 2025 and 2026.

The tightening of monetary policy has increasingly visible consequences on the economy: the rise in the cost of credit is increasingly weighing on businesses and households, particularly affecting real estate.

Several central banks maintain their monetary course

The ECB wants to maintain high rates as long as necessary, because it fears a new surge in energy prices against a backdrop of geopolitical tensions, particularly in the Middle East. She is also worried about wage increases which could fuel a rebound in prices. The ECB has also announced that it intends to accelerate the reduction of the balance sheet of debt acquired during the years of low inflation and Covid-19.

The institute will only reinvest half, i.e. 7.5 billion euros per month on average from July 2024, i.e. six months earlier than planned, the debt acquired as part of the emergency plan against pandemic (the PEPP) launched in 2020. These reinvestments will stop at the end of 2024, according to a press release.

Other central banks decided on Thursday to maintain their monetary course: the Swiss National Bank did the same, maintaining its main rate at 1.75% while inflation, which fell to 1.4% in November, remains below monitoring.

Also capping a turbulent year, the Bank of England left its key rate unchanged at 5.25%, ruling that inflationary pressures persisted, and that rates were likely to remain high “for a prolonged period”.

The Central Bank of Norway, noting that inflation remains too high, raised it for the fourteenth time in more than two years, from 0.25% to 4.5%. But she plans to keep it at that level “for a while.”