The ECB follows the interest rates of the Fed and the Bank of England – Barron's

The European Central Bank left its key interest rates unchanged on Thursday, following the lead of the Federal Reserve and the Bank of England.

The ECB left its main refinancing rate at 4.5% and its deposit rate at 4%. Earlier in the day, Bank of England policymakers left their key interest rate at 5.25% in their final monetary policy decision of the year. The Fed decided on Wednesday to keep the key interest rate in a range of 5.25% to 5.5%.

The BOE and ECB spent much of 2023 following the Fed’s moves and raising borrowing costs, but didn’t go quite as far as their US counterpart. The question now is how their paths might diverge in 2024.

Like the Fed, the ECB also gave some dovish signals. It lowered its inflation forecasts for this year and next, predicting that the rate could fall very close to its target in 2024.

The BOE appears to be the most likely central bank to raise interest rates again or maintain high interest rates for longer. Three BOE policymakers had preferred a quarter-point hike this month, and the rate-setting committee said risks to consumer prices were still to the upside.

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Policies need to be restrictive “for an extended period” to bring inflation back to target, the bank said in a statement. “We still have a long way to go,” BOE Governor Andrew Bailey said in a letter to the U.K. Treasury released along with the rate decision.

The US economy appears to be stronger than Europe’s. British production fell unexpectedly in October, data showed on Wednesday. The German economy – the largest of the 20 countries that use the euro – shrank in the third quarter, while the French economy grew just 0.1%. In contrast, the U.S. economy grew at its fastest pace in nearly two years in the July-September period.

Inflation rates are falling rapidly in all three economies, but to different degrees. In the UK it was 4.6% in October, well above the US rate of 3.1%. In the Eurozone it is 2.9%. The Fed, ECB and BOE all have the same goal of keeping inflation at around 2%.

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The Fed kept its options open in Wednesday’s decision. Chairman Jerome Powell said officials “believe our benchmark interest rate is likely to peak or be close to it during this tightening cycle.” Their forecasts point to three quarter-point rate cuts next year. Markets are pricing in the Fed’s first rate cut around March.

Write to Brian Swint at [email protected]

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