The ECB’s Monetary Tightening Campaign is Nearing its End

The ECB’s Monetary Tightening Campaign is Nearing its End

The monetary tightening campaign conducted by the European Central Bank for the past year is nearing its end, and it may already be over, according to the Governor of the Central Bank of Portugal, Mario Centeno.

– It can be expected that the cycle of interest rate increases, for now and under current economic conditions, is concluded – Centeno said this week, adding that current interest rates are compatible with bringing inflation down to the medium-term target.

– The ECB will decide on further increases from meeting to meeting, but the message that emerged in September is quite clear – Centeno stated, also noting that the full effect of the transmission of monetary policy on financing conditions is still not visible.

Namely, the European Central Bank raised three key interest rates last month for the tenth consecutive time by 25 basis points, and Centeno’s statement about a ‘quite clear message’ refers to the ECB’s cautious approach to further increases and the hint from the central bank’s president, Christine Lagarde, that rates may have peaked.

When announcing the new interest rate hike in September, the ECB indicated that based on their latest assessment, they believe that key interest rates are at levels that, if maintained long enough, will significantly contribute to a swift return of inflation to the target level.

– In the September macroeconomic projections by ECB experts for the euro area, average inflation is projected at 5.6 percent in 2023, 3.2 percent in 2024, and 2.1 percent in 2025. This is an upward revision for 2023 and 2024 and a downward revision for 2025. The upward revision for 2023 and 2024 mainly stems from higher energy price levels – the ECB stated when announcing the interest rates.

Centeno warned that, although nominal interest rates of the ECB might now remain stable due to falling inflation, real interest rates that directly affect companies, households, and economies are expected to continue to rise, which requires ‘some caution in decision-making in the near future’.

– The transmission of monetary policy is time-delayed, it takes time to occur and does not affect all countries in the same way at the same time – Centeno added, urging banks to take care of the loans they have approved at this moment and to use this time to create a ‘financial shield’ to face future uncertainties.