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ECB maintains aggressive rate posture as peers ease off

By Charbel Kadib
1 minute read

The central bank has lifted interest rates for the 10th time since commencing its cycle after revising its inflation outlook.

The European Central Bank (ECB) has increased interest rates by a further 25 bps to 4.25 per cent – taking the 10th hike since July 2020.

The ECB has now lifted rates by a cumulative 450 bps since commencing its tightening cycle.

According to the central bank’s post meeting statement, the latest 25 bps increase reflects its new assessment of the inflation outlook following a review of incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.


The ECB has revised up its inflation projections for the eurozone, now forecasting average inflation at 5.6 per cent in 2023 and 3.2 per cent in 2024.

The revision was mostly attributed to changing expectations for future energy prices.

“Inflation continues to decline but is still expected to remain too high for too long,” the ECB noted in its post-meeting statement.

“The governing council is determined to ensure that inflation returns to its 2 per cent medium-term target in a timely manner.

Moreover, the central bank said it expects to maintain its tightening bias for the foreseeable future and has not ruled out further hikes.

“Based on its current assessment, the governing council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” the ECB noted.

“The governing council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.

“The governing council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.”

The ECB’s rate call comes just days ahead of the next US Federal Open Market Committee (FOMC) hearing, during which the central bank is tipped to keep the funds rate on hold at 5.25–5.5 per cent amid mounting evidence of disinflation.

“The Fed will still keep rates on hold in September, but it means officials will almost certainly keep one final hike in their official forecasts, even though we don’t think they will carry through with it,” NG’s chief international economist, James Knightley, said.

In Australia, the Reserve Bank of Australia (RBA) left the cash rate on hold for the third consecutive month following 400 bps in cumulative tightening.

The tightening cycle has largely achieved its disinflation objective, with the latest data from the Australian Bureau of Statistics (ABS) revealing the consumer price index (CPI) eased to 4.9 per cent in the 12 months to July 2023.

But according to Deutsche Bank strategists Tim Baker and Nav Aithani, the RBA has done enough to ease inflationary pressures and may have gone too far, despite actioning fewer hikes than some of its global counterparts.

The Deutsche Bank strategists have claimed the local tightening cycle has imposed a heavier burden on Australian borrowers, given wages growth is subdued relative to international counterparts and more local banks have readily passed on hikes to consumers.

“The pass-through of policy rates to the average mortgage rate has been quite large in Australia, and quite minimal in the major regions,” the analysts report.

“The average rate on outstanding mortgages has doubled to 5.5 per cent in just 15 months.”

This, they added, reflects the larger proportion of Australian borrowers with variable rate home loans.

“In sharp contrast, with the prevalence of 30-year fixed mortgages, the average US mortgage rate is up a miniscule 30 bps – likely helping fuel recent US growth exceptionalism,” the Deutsche Bank analysts added.

“It’s not much higher in Europe – 66 bps in the euro area, 97 bps in the UK.

“The pass-through to average mortgage rates in all three of those regions is below 20 per cent versus 70 per cent in Australia.”

As such, the Deutsche Bank strategists have claimed the RBA’s monetary policy strategy has been more aggressive than that of its counterparts.

“So, to the extent that the mortgage rate channel is a major one for policy transmission, the RBA has actually tightened far more than major peers,” they observed.

The central bank is expected to keep rates on hold over the short-to-medium term, before considering cuts in 2024.

ECB maintains aggressive rate posture as peers ease off

The central bank has lifted interest rates for the 10th time since commencing its cycle after revising its inflation outlook.

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