Following the latest decision, the ECB set its base interest rate at 4.5 percent per year, with a deposit rate of 4 percent and a short-term lending rate of 4.75 percent. The board of directors stated this in a press release after the meeting.
What do ECB interest rates affect?
The base rate guides the cost at which the ECB lends euros to banks within the euro area. It serves as a benchmark for the price of money and has a direct influence on the cost of loans and the level of financial activity in member economies.
Short-term lending operations provide banks with overnight or very short-term liquidity, enabling instant payments. Banks borrow from the ECB and from one another to keep settlement flows smooth and fast.
The deposit rate determines the returns banks earn by placing funds with the ECB overnight. This, in turn, influences how much banks offer to customers for their deposits.
The regulator explained its rationale: the Governing Council is focused on returning inflation to the medium-term target of 2 percent in a timely manner.
Forecasts indicate euro area inflation around 5.6 percent in 2023, with expectations of 3.2 percent in the following year and 2.1 percent in 2025. The ECB noted that 2023 and 2024 projections reflect elevated energy prices. Core price pressures remain high, though the central bank projects inflation excluding energy and food to average about 5.1 percent in 2023, 2.9 percent in 2024, and 2.2 percent in 2025.
What happens next for Europe?
Anton Tabakh, chief economist at Expert RA, noted that the decision had been anticipated. Inflation in the euro area stood at 5.3 percent in August.
He commented that the ECB has completed its rate-hiking cycle and that a further tightening is unlikely if economic momentum stays weak. A rise of 25 basis points in key rates would be a notable adjustment, given years of low borrowing costs. This marks a significant shift for an economy used to near-zero rates for about a decade and a half, according to Sovcombank’s chief analyst Mikhail Vasiliev.
The analyst sees higher deposit rates boosting savings, cooling consumption, and easing inflation, while higher lending costs could restrain borrowing, delaying investment and reducing debt-financed spending. Yet this dynamic should help slow price growth over time.
Vasiliev did caution that a risk of stagflation remains a possibility for the euro area this year, with some indicators pointing to weak growth alongside elevated inflation. He suggested that Germany, a key euro-area economy, may be flirting with such a scenario.
He also highlighted broader pressures from a slower global economy, ongoing high inflation, a heavy debt burden in euro-area countries, and the higher US policy rate in recent years. He attributed some weakness to tensions in global trade and lingering effects from the Ukraine conflict. The overall view is that euro-area GDP could hover near flat growth as the year closes.
In terms of exchange rates, the euro is expected to soften versus the dollar in the near term. Analysts anticipate a gradual decline in the EUR/USD rate toward the 1.04–1.05 range in the coming months, with some noting the possibility of further movement depending on the euro’s performance. Local analysts also pointed out how the currency pair might respond to the rate decision in the near term and over the medium term.
Implications for Russia
Vasiliev outlined three implications of the ECB decision for Russia. First, economic ties between Europe and Russia remain intact, with continued gas, oil, and product trade passing through various channels, including intermediaries. Imports from Europe to Russia occur via third countries as well, a practice that persists in a complex, layered trade network.
He argued that ECB moves will influence Russia mainly through the state of the European economy. Stronger European growth can lift demand for Russian supplies, while slower growth could dampen it.
Second, the decision may encourage more cautious corporate behavior, with slower investment and weaker demand for Russian exports. The overall impact on Russia would likely be modest unless Europe slides into a broader recession, which would sharply reduce demand for gas, oil, and related products.
On the upside, tighter financial conditions in Europe could ease inflation pressures, reducing the price of European goods for Russian buyers. That effect would be gradual and take several months to materialize.
Associate Professor Olga Panina of the Finance University noted that the ECB’s move has an indirect effect on Russia. A base-rate rise could strengthen the euro against the ruble, potentially pressuring exporters and lifting import costs in the near term.
Analysts suggested the euro could climb against the ruble in the short term, while the longer-run impact on the ruble may fade. Movements in the euro, dollar, and other major currencies often track together, influenced by global and regional dynamics.
Previously, the Russian financial system was closely linked to European markets. The ECB decisions mainly affected Russian deposit and loan rates in euros. Today, the role of the euro in Russia has diminished as a dedollarization push reduces reliance on euros for financing. Banks are altering funding strategies, and the balance of currency use within Russia continues to evolve as policy settings adjust.