What Lies Ahead for Interest Rates as the ECB Takes a Pause?

The Monetary Policy Committee of the European Central Bank (ECB) has had quite a busy eighteen months. After years of maintaining historically low interest rates, they shifted gears due to inflationary pressures.

Even the specter of a banking crisis on the continent didn't deter Christine Lagarde and her team from their rate-hiking path. For ten consecutive meetings from July of the previous year, they focused on combating inflation and raised interest rates each time.

However, the ECB recently decided to pause this cycle of rate hikes. So, what's next for interest rates, and could the ECB even consider reducing rates in the near future?

Late to the Game

The current surge in inflation began in earnest around mid-2021. As global supply chains awakened following the easing of pandemic restrictions, consumer demand surged, boosted in part by savings accumulated during lockdowns.

The Bank of England became the first major central bank to raise interest rates by the end of the year, followed by the US Federal Reserve a few months later. In contrast, the ECB adopted a cautious "wait and see" approach and delayed its rate hikes compared to its counterparts.

It finally joined the rate-hiking path with a significant move in July of the previous year. While many expected a modest 0.25% rate hike, the ECB surprised by raising rates by a full 0.50%. CODCODCODCODCODCODCODCOD

Christine Lagarde's language on that day became decidedly hawkish, and forward guidance on rate hikes was abandoned. The ECB declared that rate decisions would be made on a month-to-month basis, depending on data.

The July hike was followed by an unprecedented 0.75% increase in September. Even the most dovish commentators agreed that, despite being late, these hikes were warranted.