The rate for the main refinancing operations is thus increased from 4.25% to 4.5%, and the deposit rate is raised to 4%, up from the previous 3.75%. The rate for the marginal lending facility goes from 4.5% to 4.75%.

Since July 2022, the ECB has raised its rates by 450 basis points to contain inflation, which stabilized at 5.3% on a year-on-year basis in August in the eurozone. While inflation has retreated from the peak of 10.6% reached in October 2022, it remains significantly above the ECB’s target of 2%, and the recent rise in oil prices raises concerns of further price acceleration in the coming months.

As Europe faces persistent cost pressures, exacerbated by the surge in energy prices, the ECB is taking a much more political stance than monetary. The reality is that Christine Lagarde had to arbitrate a divided council between central bankers from the south, concerned about sluggish European growth, and central bankers from the north, who are much more hawkish. The debate could be summarized by exchanges between the Portuguese Mario, who feared that a further rise in borrowing costs would jeopardize the European economy, and others like Slovakia’s Pierre Kazimir, who believed that inflation would not return to the 2% target without further measures.

Indeed, the dovish had some arguments. They could cite the economic slowdown, the reversal in underlying inflation trends, the likely end of the interest rate hike cycle in the United States, and concerns about China’s resilience to justify a pause. Surveys of businesses show that services have started to follow the manufacturing sector into decline as persistent inflation takes its toll. Weak global demand and China’s slowdown weigh on exports, while construction is partly decreasing due to rising financing costs. This toxic mix had raised the spectre of stagflation, even though the current situation is very different from that of the 1970s and 1980s when unemployment had skyrocketed, unlike the historically low levels observed today.

So, the laconic committee satisfies both the hawkish and the dovish. “The Governing Council considers that the ECB’s key interest rates have reached levels that, if maintained for a sufficiently long period, will strongly contribute to the earliest possible return of inflation to the target level,” the central bank also stated, suggesting that it will not proceed with any further rate hikes this year. Whether this position is wise is another question.

But for sure, the decision and the message suggest a weakening of the Euro against the dollar for at least the next three months.