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ECB freezes interest rate hikes as eurozone feels pinch

European Central Bank policymakers on Thursday decided to leave interest rates unchanged for the first time in 15 months, as their previous policy moves seemed to be biting.

ECB freezes interest rate hikes as eurozone feels pinch
European Central Bank president Christine Lagarde gestures as she addresses a press conference with the President of the Greek Central Bank after the Governing Council meeting in Athens on October 26, 2023. (Photo by Aris Oikonomou / AFP)

“The Governing Council today decided to keep the three key ECB interest rates unchanged,” read a statement published on the financial governing body’s website on October 26th. 

The decision to stand pat ends a streak of 10 straight hikes that has seen interest rates climb faster and further than ever.

Since July 2022, the ECB has cranked rates up by 450 basis points to tackle inflation driven in large part by surging energy prices in the wake of Russia’s invasion of Ukraine.

The long tightening cycle has left the key deposit rate at four percent, its highest mark in the history of the central bank.

Once red-hot eurozone inflation has started to settle, falling to 4.3 percent in September from its double-digit peak towards the end of last year.

While the figure is still more than twice the ECB’s target of two percent, rising borrowing costs have also shown signs of weighing on the currency bloc.

The Frankfurt-based institution’s September economic projections revised down the forecast for growth in the eurozone, while the outbreak of the conflict in the Middle East has further clouded the horizon.

As such, the ECB was unlikely to “seriously” think about raising rates again at the moment “amid rising uncertainty over the global outlook”, said Pictet analyst Frederik Ducrozet.

READ ALSO: What happens to mortgages in Spain when the Euribor drops?

‘Clear impact’

ECB policymakers were in “watch and see” mode Thursday, Ducrozet said, with new official forecasts only set to be published at the governing council’s next meeting in December.

The most recently released economic data, however, painted a pessimistic picture of the eurozone that could encourage policymakers to hold off from more hikes.

Business activity in the bloc slumped in October, according to a closely watched Purchasing Managers’ Index (PMI) survey put out by S&P Global, raising the possibility of a mild recession in the second half of 2023.

Eurozone banks have also been tightening their lending criteria for households and businesses, according to the ECB’s own survey of financial institutions published this week.

“Weaker economic conditions and higher interest rates are having a clear impact”, said ING economist Bert Colijn.

The borrowing squeeze was a sign that the ECB’s monetary policy was feeding through “forcefully” to the economy, Colijn said.

A good reason not to hike further, he suggested, “especially given the fact that the ECB itself only expects the biggest impact of higher rates in early 2024”.

The central bank could meanwhile consider winding down its balance sheet faster than currently planned to further apply the brakes on inflation.

Pause or plateau?

The ECB’s 26-member governing council would no doubt discuss the possibility, but would likely “push back” against the idea, deferring a decision to a later date, said Ducrozet.

ECB President Christine Lagarde has acknowledged the “pain” felt by consumers as a result of aggressive rate hikes, but has cautioned against relenting too soon.

While inflation has come down, the ECB does not expect it to return to the target of two percent before 2025, according to its most recent projections.

Lagarde would “leave the option of further interest rate hikes on the table”, if the ECB said Jack Allen-Reynolds of Capital Economics.

Holding rates at their current levels this week could be presented as a temporary “pause”, said Allen-Reynolds, but there was every chance of the pause becoming a “plateau”.

The question now, according to Pictet analyst Ducrozet, was “how long policy rates should be kept at current levels”.

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WORK PERMITS

‘Tinder for jobs’: EU’s new job scheme for non-EU workers moves step closer

The creation of a common EU Talent Pool platform, in which non-EU nationals can register their profiles and find jobs across the 27 member states, has moved a step closer to reality.

'Tinder for jobs': EU's new job scheme for non-EU workers moves step closer

At a meeting of the Justice and Home Affairs Council in Luxembourg, the EU Council, which includes representatives of each of the 27 member states, agreed a joint position on the proposal, referred to as “Tinder for jobs” by EU Home Affairs Commissioner Ylva Johansson. 

The Council will now begin negotiating with the European Parliament to agree on the final legislative text on the proposal, which is part of the EU’s broader skills and talent mobility package. 

What’s the scheme?

“This will not replace anything but it will be an additional tool to make recruitment from outside the EU easier,” Johannes Kleis, a press officer at the European Council, told The Local. “It should help to overcome some barriers that employers might find if they look for staff outside the EU, and this portal will be an easier entry point for third country jobseekers.” 

In a press release announcing the agreement, the Council said it hoped to reconcile principles of fair recruitment with a secure and comprehensive migration system while also “reinforcing the position of the European Union in the global race for talent”. 

READ ALSO: The new scheme to help non-EU nationals find jobs in Europe

The EU’s Home Affairs Commission Ylva Johansson hsa described the Talent Portal as ‘Tinder for jobs’. Photo: Simon Wohlfahrt/AFP

The idea is to set up an EU-wide online platform where jobseekers from outside the EU can set up profiles detailing their skills, qualifications, work experience and which languages they speak. Employers from all participating member states will then be able to post up jobs to the platform. 

Only job vacancies involving skills or professions where member states or the EU as a whole have declared a labour shortage will be listed on the platform. 

The Talent Pool will be designed to help EU employers overcoming some of the challenges of recruiting internationally by helping ensure the “accuracy, quality and comparability” of the foreign applicants’ qualifications and skills. It will also help applicants overcome some of their current difficulties in “accessing and understanding information about recruitment processes” as well as reducing costs. 

The Talent Pool is not intended to set up a common work permit system, with anyone who gets a job through the platform still having to apply for a regular work permit in the country where they find a job. 

The Council has added several new proposals to the system put forward by the European Commission in November, setting up a withdrawal procedure through which member states can leave the Talent Pool after giving six month’s notice.

The Council also wants to empower member states to be able to decide whether individual employers can post up vacancies, whether private employment agencies can do so, or whether only state-run national employment agencies can do so.   

What happens next?

“We’re at the beginning,” Kleis said. “The European Parliament and the Council will now have to sit together to agree on the legal text, and that will happen after the summer. From the Council side, this is the first step but the legislation has yet to be agreed on. So there a lot more hoops to jump through.”  

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