The European Central Bank Maintains Rates, Confirms Policy is in a "Favorable Range"
Boris Vujčić, a member of the European Central Bank's Governing Council, reiterated in a speech in Miami that the current monetary policy has reached a balance point, effectively controlling inflation without stifling economic growth. He stated, "We have achieved our phase targets; inflation has returned to around 2%, and the economy continues its growth momentum."
In last week's meeting, the European Central Bank held the key deposit rate steady at 2% for the third consecutive time, emphasizing that the current rate level is "appropriate and robust." Since initiating the rate reduction cycle in 2024, the bank has lowered rates eight times, with a total reduction of 200 basis points. The bank believes the transmission effects of previous policies are gradually becoming evident, and the monetary environment no longer constrains the economy.
Eurozone Economy Outperforms Expectations
Recent data shows that the Eurozone inflation rate rose slightly to 2.2% in September, still within the target range. Economic activity has significantly rebounded—October's Composite Purchasing Managers' Index (PMI) rose to 52.5, marking a 29-month high, indicating strong recovery in service demand and employment growth. Analysts point out that the European economy is entering a "stable expansion phase," providing ample reason for the central bank to maintain the current interest rates.
The European Central Bank stated in its meeting declaration that, thanks to a robust labor market and improved household assets, the Eurozone economy has "the capability to withstand external shocks." However, the declaration also warned that geopolitical tensions and trade disputes could still affect the inflation path, necessitating policy flexibility.
Vujčić: Monetary Environment is Robust but Risks Accumulate
Vujčić emphasized in his speech that while the effects of monetary policy are positive, potential financial risks should not be overlooked. He specifically mentioned that valuations in some asset markets are high, and retail fund returns consistently outpace hedge funds, a phenomenon historically seen as a market overheating signal. He warned, "Loose financial conditions breed risks, and we must closely monitor capital flows and leverage levels."
Furthermore, he urged member state governments to maintain fiscal discipline and avoid expanding deficits in a loose monetary environment. He noted that fiscal policy inconsistent with monetary policy direction could undermine inflation suppression efforts and impact market confidence.
Market Expects a Hold in December
Looking towards the year's end, the European Central Bank will release a new round of quarterly forecasts in December. The market broadly expects that the policy will remain stable at that time. Recent statements by several central bank officials indicate that the decision-making body prefers a "data-driven approach" and will not rush to adjust rates until inflation remains consistently stable.
Bundesbank President Nagel also emphasized early this week that economic data are largely consistent with September's forecasts and that "there is no need to alter borrowing costs," reaffirming the necessity to "retain all options" to address potential uncertainties.
Service Sector Drives Recovery, Inflation Risks are Mild and Manageable
Structurally, the rise in Eurozone inflation mainly comes from service sector price increases, while manufacturing costs remain stable. Comprehensive input cost inflation has fallen to a three-month low, while the pace of sales price increases is the fastest in seven months, indicating that demand recovery has not led to overall price pressures. Employment growth has hit a 16-month high, with service sector hiring offsetting manufacturing job cuts.
Analysts believe the Eurozone economy is experiencing a "soft landing" phase: moderate growth, controlled inflation, and stable employment. The European Central Bank's policy stance thus becomes more sustainable.
Robust Policy Lays Foundation for Mid-term Recovery
Overall, the European Central Bank has successfully avoided recession risks while achieving price stability goals. As policy effects continue to unfold, the Eurozone is exhibiting a moderate recovery trend. However, as Vujčić noted, being vigilant against market overheating and fiscal risks remains crucial. In the future, the European Central Bank may need to strike a delicate balance between stability and risk prevention to ensure the Eurozone's economy navigates the new cycle smoothly.
