The European Central Bank has paused its toughest cycle of interest rate increases since the launch of the euro amid growing fears about the eurozone economy.

In a decision widely expected in financial markets, the ECB left its key policy rates unchanged for the first time in more than a year, halting a round of 10 previous increases in the cost of borrowing after concluding it had done enough for now to tackle the rising cost of living.

Although inflation remains higher than the bank’s 2% target, concerns are mounting about the impact of rate rises on European economies, with warnings of a recession in the single-currency area led by a downturn in Germany, where a manufacturing slump led to business activity contracting for a fourth straight month in October.

“The economy is likely to remain weak for the remainder of this year,” said Christine Lagarde, the ECB president. “But as inflation falls further, household real incomes recover and the demand for euro area exports picks up, the economy should strengthen over the coming years.”

Speaking after the decision in Athens, Lagarde warned that weaker growth in the global economy would weigh on the eurozone, with risks from geopolitical tensions amid the Israel-Hamas conflict.

“This may result in firms and households becoming less confident and more uncertain about the future, and dampen growth further,” she said.

Thursday’s decision leaves the key deposit rate, paid on commercial bank deposits, at 4% – the highest since the euro was launched in 1999.

The main refinancing operations rate, providing the bulk of liquidity to the banking system, was left unchanged at 4.5%, while the marginal lending facility rate, offering overnight credit to banks, was left at 4.75%.

The US Federal Reserve and the Bank of England are widely expected to keep rates on hold at policy meetings next week.

With inflation at more than twice the central bank’s target, economists expect borrowing costs will remain at elevated levels for a prolonged period of time across the 20-country bloc.

The ECB said it was determined to ensure inflation returns to its 2% medium-term target, saying its key interest rates were “at levels that, [if] maintained for a sufficiently long duration, will make a substantial contribution to this goal”.

The decision aligns the ECB with the US Federal Reserve and the Bank of England, as the world’s leading central banks pause to take stock after the sharpest cycle of interest rate increases in decades.

It comes at a delicate moment for the world economy as rising oil prices add to inflationary pressures, while US growth remains more resilient than expected. Figures from the US economy showed growth accelerated in the third quarter to 4.9% on an annualised basis – stronger than forecast by economists.

Lagarde said the ECB stood ready to take further action on borrowing costs as inflation was “expected to stay too high for too long,” but said that previous rate rises were increasingly dampening demand and would help to bring inflation down again over time.

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Inflation across the eurozone fell sharply in September to 4.3%, from 5.2% in August. A year earlier, the rate was 9.9% after the increase in global energy prices following the Russian invasion of Ukraine.

However, higher borrowing costs, stubbornly high energy prices and a wider slowdown in international trade are having a worsening impact, with Germany – Europe’s largest economy – especially hard hit.

Business surveys show private-sector activity in Germany contracted for a fourth straight month in October amid a collapse in manufacturing output, suggesting the country may already have entered recession. Germany’s dominant industrial sector suffered a new shock on Thursday, when shares in the engineering firm Siemens Energy plunged as it sought a bailout from the German government, after a string of technical problems and higher costs at its wind turbine arm.

The Bundesbank, Germany’s central bank, said on Monday that its economy was likely to have shrunk in the third quarter of 2023.

Germany posted zero growth in the second quarter and its economy contracted by 0.1% in the first three months of the year. Economists regard two consecutive quarters of falling economic output as a recession.

Marcus Brookes, chief investment officer at Quilter Investors, said the ECB was unlikely to raise rates again. “The pressure will quickly shift to cutting rates given the lack of economic growth. This is the problem facing central banks now.

“They have successfully guided economies to this level of rates without tipping them into full-blown recessions, although Germany is experiencing one and others will have felt like they were in one.”