ECB holds interest rates steady as it continues to aim for 2% inflation and stave off recession

The European Central Bank (ECB) on Thursday announced that it is keeping interest rates steady and expects inflation to decline throughout 2024.

The ECB’s decision to maintain current key interest rates was highly anticipated, and can be understood as an end to its hiking cycle that began in July 2022 amid runaway inflation. Its decision also comes shortly after the US Federal Reserve also announced it would be keeping rates steady during Wednesday’s meeting.

“While inflation has recently exhibited declines, a temporary upswing is expected in the near future,” stated the ECB in its announcement.

As for what to expect in the upcoming year, Eurosystem staff expect 2024 to see a gradual decline in inflation and economic growth. Beyond that, the economy is expected to recover because of rising real incomes – as people benefit from falling inflation and growing wages – and improving foreign demand.

Eurosystem staff therefore see growth picking up from an average of 0.6 per cent for 2023 to 0.8 per cent for 2024, and to 1.5 per cent for both 2025 and 2026. For context, Malta is expected to close of 2023 at 4.1 per cent GDP growth and inch higher in 2024 to reach 4.2 per cent growth.

In a statement, the ECB said that the Governing Council, it’s main decision making body, is determined to ensure that inflation returns to its two per cent medium-term target in a timely manner. “Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.”

According to projections, headline inflation within the EU is expected to average 5.4 per cent in 2023, decreasing substantially to 2.7 per cent in 2024, and dropping further to 2.1 per cent in 2025. These downward revisions, particularly for 2024, represent a shift from the earlier September estimates of 3.4 per cent.

When excluding energy and food prices, core inflation is expected to average five per cent in 2023, decrease to 2.7 per cent in 2024, further decline to 2.3 per cent in 2025, and finally stabilise at 2.1 per cent in 2026.