The European Central Bank: the interest rate will remain at 4.5%

The European Central Bank left the interest rate at 4.5%. He also announced that he will continue reducing his balance sheet, that is, he will reduce the euro balance built up in the last decade and a half while the bank prints trillions of euros to the capital market. According to the bank’s statement, the interest rate will help lower the level of inflation in the Eurozone to a target of 2%, if it is maintained over time.

The decision did not come as a surprise, but a question arises regarding the high interest rate policy in view of the slowing growth rate in the bloc and the containment of inflation. Inflation in the bloc in 2023 decreased and reached 2.9%, not far from the target. Growth rates are dismal. In the last four quarters for which there is data, from the last quarter in 2022 to the third in 2023, the average growth rate per quarter is 0%. In two of the quarters the bloc’s economy shrank by 0.1%, and in the other two it grew by 0.1%.

The high interest rate policy is designed to slow down the economy in order to curb price increases, that is, to harm economic activity through the demand side. However, the bloc’s economy does not suffer from excess demand, and it seems that neither does excess price increases, so this policy is becoming more and more difficult to justify in light of the data.