The European Central Bank left interest rates unchanged on Thursday for the first time since July last year.
The closely watched deposit rate has stayed at 4 per cent, which is a record high.
The central bank previously raised rates 10 times in a row in its battle against inflation.
It has increased interest rates by a combined 4.5 percentage points since July last year, but hinted at a pause last month, as the rate rises work their way through the economy and lower inflation.
But while inflation has been falling for months and is now at 4.3 per cent, half of what it was last year, analysts worry the brakes may have been applied so hard that the economy tips over into recession.
“Our past interest rate increases continue to be transmitted forcefully into financing conditions,” said European Central Bank President Christine Lagarde.
“This is increasingly dampening demand and thereby helps push down inflation. We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner.
“Based on our current assessment, we consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal.
“Our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary.”
As such, markets are now indicating that rates may have peaked and the next move by the ECB will be a cut.
“The ECB expects that if the current rates are left unchanged for a sufficiently long period, they will have the desired effect on inflation,” Daniela Hathorn, Senior Market Analyst at Capital.com told The National.
“This means that any further rate hikes from the ECB are unlikely, but they will continue to monitor inflation, as it is still deemed too high, and act accordingly.”
Economists are keeping a close eye on the oil markets in the wake of the Israel-Gaza conflict. Any sharp increase in the price of oil could put upward pressure on inflation and hold back growth. (National)
