ECB Holds Interest Rate Steady for Third Time... "Too Early for Rate Cut" (Comprehensive)

Base Interest Rate Maintained at 4.5%
"Inflation Slowdown Expected... Middle East Tensions Pose Upward Pressure"

The European Central Bank (ECB) announced on the 25th (local time) that it will keep key policy interest rates, including the benchmark rate, unchanged. This marks the third consecutive hold, reflecting the view that it is premature to cut rates.

At the monetary policy meeting held that day, the ECB decided to keep the benchmark interest rate at 4.50% per annum, the deposit facility rate at 4.00% per annum, and the marginal lending facility rate at 4.75% per annum.

Christine Lagarde, Managing Director of the International Monetary Fund (IMF) (Photo by AP Yonhap News)

The ECB had raised rates 10 consecutive times from July 2022 until September last year, and has maintained the benchmark rate at 4.5% since October last year. Accordingly, the interest rate gap between South Korea (benchmark rate 3.50%) and the Eurozone (20 countries using the euro) remains at 1.00 percentage point.

In its monetary policy statement, the ECB said, "Excluding energy-related base effects, the downward trend in inflation continues, and so far, rate hikes have continued to have a strong impact on financing conditions," adding, "The existing assessment of inflation outlook has been confirmed by indicators." It also stated, "If key interest rates are maintained sufficiently long, it will significantly contribute to achieving the inflation target of 2%."

Christine Lagarde, President of the ECB, forecasted, "With the reduction of energy shocks, supply chain bottlenecks, and the effects of reopening after the pandemic, and with monetary tightening weighing on the economy, inflation will slow further this year."

Regarding the inflation rate, President Lagarde evaluated, "The rebound was weaker than expected," and "excluding base effects, the overall downward trend continued." On the other hand, she noted that energy prices and freight rates rising due to geopolitical tensions in the Middle East, as well as wage increases, could exert upward pressure on inflation. The Eurozone inflation rate had been declining for seven consecutive months since May last year but jumped from 2.4% in November to 2.9% in December.

The ECB takes a cautious stance on market expectations for early rate cuts. President Lagarde said, "The Governing Council agreed that discussions on rate cuts are premature." She added that instead of specifying a timing, they will monitor the indicators. Some ECB officials believe that rate cuts could be considered after wage statistics for the first quarter are released. This contrasts with market expectations that the ECB will cut rates around March to April.

CNBC reported, "The ECB is facing a sluggish Eurozone economy and financial stability vulnerabilities but is focusing on lowering inflation from the current 2.9% to 2%," adding, "The ECB is deeply concerned that cutting rates too quickly could partially undo the effects of the existing tightening policy."

Additionally, the ECB maintained its plan to reduce the balance sheet, which had expanded significantly after the COVID-19 pandemic. Regarding the Pandemic Emergency Purchase Programme (PEPP), it had previously decided to reduce reinvestments of maturing bonds by an average of 7.5 billion euros (about 10.9 trillion won) per month starting in the second half of the year. From the end of the year, it plans to completely stop principal reinvestments.

This content was produced with the assistance of AI translation services.