Where do we expect the eurozone interest rates to be in five years?
Key Takeaways
- ECB paused the rate increase cycle one year after the first hike.
- Hikes are the eurozone bank’s arm in battle with high inflation.
- The bank will announce its next decision on monetary policy on December 14.
- What is the impact of interest rates on cryptocurrencies?
The European Central Bank (ECB) decision to keep its key interest rates unaltered at its last meeting was agreed by all members, minutes published on Thursday, November 23, showed. The bank asserted that the impact of earlier rate hikes is making a significant impact. However, the ECB cautioned that inflation would persist at elevated levels for an extended period.
In its first hiatus since initiating its series of rate increases in July of the previous year, the ECB, headquartered in Frankfurt, maintained the interest rates for its primary refinancing operations, marginal lending facility, and deposit facility at 4.50%, 4.75%, and 4.00% respectively.
Inflation Still Too High
“Inflation is still expected to stay too high for too long, and domestic price pressures remain strong. At the same time, inflation dropped markedly in September, including due to strong base effects, and most measures of underlying inflation have continued to ease. The Governing Council’s past interest rate increases continue to be transmitted forcefully into financing conditions. This is increasingly dampening demand and thereby helps push down inflation,” the ECB said.
“The Governing Council is determined to ensure that inflation returns to its 2% 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.”
Inflation in the eurozone abated last month, fading to its tamest pace in roughly two years.
The single currency area’s annual inflation rate cooled to 4.3% in September from 5.2% in August, Eurostat confirmed. The rate of inflation is markedly slower than the 9.9% seen in September 2022.
Eurozone inflation hit a recent peak of 10.6% in October 2022 but has gradually declined since. It is now at its lowest since October 2021, which was before energy prices shooting up following Russia’s invasion of Ukraine.
The ECB has speedily enacted 450 basis points of interest hikes in total over the past year or so. Its first in the current cycle was in July of last year, before that, rates remained unchanged since 2019.
Unanimous Decision
Introducing the European Central Bank (ECB)
The European Central Bank (ECB) serves as a central component within the Eurosystem and the European System of Central Banks (ESCB), making it one of the seven institutions of the European Union (EU). It holds a position of immense significance on the global stage as one of the world’s foremost central banks.
The ECB Governing Council assumes the responsibility of formulating monetary policy for both the Eurozone and the European Union. It manages the foreign exchange reserves of EU member states, conducting foreign exchange operations, and defining the intermediate monetary objectives and key interest rates within the EU.
To execute these policies and decisions, the ECB Executive Board operates under the authority of the Governing Council and may issue directives to the national central banks as needed. Additionally, the ECB possesses the exclusive authority to authorize the issuance of euro banknotes, while the issuance of euro coins by member states requires prior approval from the ECB. The ECB also oversees the functioning of the TARGET2 payments system.
Established in May 1999 through the Treaty of Amsterdam, the ECB has the crucial mission of ensuring and preserving price stability. Subsequently, on December 1, 2009, the Treaty of Lisbon came into effect, officially designating the ECB as an EU institution.
Eurozone Expansion
Initially, the ECB was established to serve the Eurozone, consisting of eleven member countries. Over time, the Eurozone expanded to include Greece in January 2001, Slovenia in January 2007, Cyprus and Malta in January 2008. Furthermore, Slovakia in January 2009, Estonia in January 2011, Latvia in January 2014, Lithuania in January 2015, and Croatia in January 2023.
Currently, to lead of the ECB is President Christine Lagarde and the bank’s headquarter is in Frankfurt, Germany. Before its new headquarters, it operated from the Eurotower.
The ECB operates in direct accordance with European Union law. Its €11 billion capital stock is collectively owned by all 27 central banks of EU member states as shareholders. The initial capital allocation key, based on the population and GDP of member states, was established in 1998 but has since undergone adjustments. Notably, shares within the ECB are non-transferable and cannot serve as collateral.
ECB Interest Rates
The key interest rates are instrumental tools the ECB uses within its operational framework to preserve price stability within the euro area.
These rates hold significant importance in conducting monetary policy, as they directly impact the cost of borrowing for various economic entities, including governments, businesses, and households, both in capital markets and the market for bank loans. Furthermore, they influence the returns on various saving instruments, such as bank deposits.
Consequently, the ECB’s monetary policy decisions have a far-reaching impact on the spending, saving, and investment choices of households and businesses, ultimately affecting overall economic activity and, in turn, inflation rates.
The ECB maintains three key interest rates:
Main Refinancing Operations (MROs) Interest Rate
ECB establishes this rate to provide the banking system with weekly liquidity injections. It determines the cost incurred by credit institutions when borrowing funds from the ECB for one week.
Deposit Facility Rate
The ECB also sets the rate for the deposit facility. This dictates the interest paid to credit institutions for their overnight deposits held at the central bank. Notably, the deposit facility rate remained in negative territory from 2014 until July 2022.
Marginal Lending Facility Rate
This rate represents the cost borne by credit institutions when they borrow money overnight from the ECB.
These interest rates are pivotal tools in the ECB’s pursuit of its monetary policy objectives. They significantly influence the broader economic landscape and inflation dynamics.
Eurozone Interest Rate Projections For The Next 5 Years
Given the multitude of uncertainties currently in play, formulating a realistic forecast for ECB interest rates over the next five years presents a considerable challenge. Nevertheless, the European Central Bank itself has offered projections extending as far as 2025 in its survey of professional forecasters.
Economic data provider Trading Economics anticipated a decrease to 2.75% in 2024 and a further decline to 1.5% in 2025, based on their econometric models.
The Influence Of Interest Rates On Cryptocurrency
Cryptocurrencies, Bitcoin included, have demonstrated remarkable resilience even in the face of rising interest rates. Notably, Bitcoin experienced significant growth, with a surge of 2,000% observed during the years 2015 and 2016.
However, it is crucial to recognize that elevated interest rates can produce diverse effects on the cryptocurrency market. Some experts argue that persistent high inflation, rising gas prices, and increased energy costs linked to higher interest rates may potentially reduce risk appetite, creating challenges for cryptocurrencies.
Central Banks And Their Impact On Cryptocurrencies
Central banks wield significant influence in shaping economic conditions as they directly impact money circulation and financial market stability. Their ability to adjust interest rates has a direct bearing on borrowing rates for financial and banking institutions.
In response to widespread inflation, major central banks in developed economies, such as the Fed, the ECB, and the BoE have chosen to raise interest rates.
It is worth noting the increasingly intertwined relationship between cryptocurrencies and these macroeconomic and monetary shifts. The decisions to raise interest rates, particularly by the Fed, have immediate repercussions for cryptocurrency markets.
