The European Central Bank on Thursday raised interest rates for the 10th time in a row, and likely the last, as part of efforts to curb inflation.
The bank raised its three main interest rates by a quarter of a percentage point and raised deposit rates to 4%, the highest in the central bank’s 20-year history.
“While inflation continues to decline, we expect it to remain too high for a long time,” the bank’s president, Christine Lagarde, said on Thursday. He said policymakers raised rates “to consolidate progress” in curbing inflation.
But Lagarde hinted that this rate hike could be the last, saying she and policymakers believe that “interest rates, if held long enough, will make a significant contribution to timely returns.” “I think the standard has been met,” he said. Achieve the target of 2% inflation rate.
As Thursday’s meeting approaches, the central bank’s decision is seen as largely a coin toss between raising rates or leaving them unchanged, with policymakers weighing progress in lowering inflation and a determination not to declare victory too soon. Ta. Investors’ bets in financial markets tilted slightly more likely that banks would raise interest rates rather than keep them unchanged.
Next week, policymakers from the Federal Reserve and the Bank of England are expected to set interest rates. Fed officials are widely expected to keep rates on hold, but the recent acceleration in U.S. inflation could keep discussions about raising rates further this year.
In the UK, authorities are expected to receive fresh inflation data just before a policy meeting that could shake expectations, but investors now believe interest rates are more likely to rise than not. I’m here. This is the bank’s 15th consecutive rate hike.
The European Central Bank has embarked on its most aggressive period of monetary tightening in the past year, raising interest rates from negative levels last July to record highs. Meanwhile, inflation in the euro area reached a double-digit peak in October, but has since halved.
“Are you satisfied?” Ms. Lagarde said. “no.”
Consumer prices rose 5.3% in August compared to the same month last year, the same pace as last month and contrary to economists’ expectations that the economy would slow due to soaring fuel prices. At the same time, domestic inflationary pressures, which policymakers are closely monitoring, remained strong. Core inflation, which excludes food and energy prices, was 5.3%.
The central bank released new economic forecasts from its staff on Thursday, saying inflation this year and next will be slightly higher than predicted three months ago due to higher energy prices. With inflation expected to rise just above the central bank’s 2% target by 2025, policymakers are trying to pave the way for a prolonged period of high interest rates that will further constrain the economy. Demand for loans from businesses and households has already weakened, and banks are tightening lending standards.
Lagarde told a news conference in Frankfurt that previous interest rate hikes had been “forced through” to the economy, adding that the strength of this pass-through was even faster than when the central bank had raised interest rates in the past. . He said: “Financial conditions are becoming tighter and demand is becoming increasingly subdued, which is a key factor in getting inflation back on target.”
The bank also revised down its economic growth forecast for the next three years, with the economy expected to grow by just 0.7% this year.
“We are at a stage where growth is very slow,” Lagarde said. “We are in difficult times,” he said, adding that the outlook for economic recovery had been pushed back further into 2024.
Earlier this week, the European Commission cut its forecast for the region’s economy, with the eurozone expected to grow by 0.8% this year, down from 1.1% forecast four months ago. Economic growth next year is likely to slow further.
Germany, the region’s largest economy, has stagnated as its industrial sector struggles under the weight of high interest rates and other costs. Business activity fell last month at the fastest pace in three years.
“The ECB will likely take a break at its next Governing Council meeting on the back of slowing growth, but if the growth outlook continues to deteriorate, the break will peak,” said Mike Bell, a strategist at JPMorgan Asset Management, in written comments. There is a possibility.” . He added that interest rates could remain unchanged for “a significant period of time” unless the region’s unemployment rate rises sharply.
Given the worsening economic outlook, traders expect the central bank to start cutting interest rates in the second half of next year.
Lagarde said policymakers had not even started discussing the idea of cutting rates, and in an interview with reporters pushed back on the idea that this would definitely be the last rate hike to maintain flexibility about future decisions. Ta. He said the view that interest rates are high enough to reduce inflation was based only on a “current assessment” of data and that the outlook could change.
There are signs of division within the central bank’s 26-member board over the optimal future direction for interest rates. Inflation rates in the euro area range from 2.4% in Spain and Belgium to 9.6% in Slovakia. At the same time, debt levels and variable rate mortgage penetration vary across countries, so the effects of rising interest rates will be felt sooner in some countries than in others.
Earlier this month, Dutch central bank governor Klaas Knott told Bloomberg News that the market was underestimating the possibility of a rate hike in September, while Slovak central bank governor Peter Kazimir said: ” he urged. But Portugal’s central bank governor, Mario Centeno, warned against “overreaching.”
Lagarde acknowledged the disagreement Thursday, saying the rate hike was not a unanimous decision. He said a “solid majority” of the board supported the hike, but some would have preferred a pause pending more information on the impact of past hikes.
Lagarde said interest rates will now be set at “a level that is sufficiently restrictive for as long as necessary,” with decisions being made in response to the latest economic and financial data, inflation measures that capture domestic price pressures, and policy. he said repeatedly. The strength of the impact of monetary policy on the regional economy.