The European Central Bank (ECB) yesterday raised interest rates for the eighth successive time and signaled more policy tightening, as it battles high inflation.
The ECB has increased borrowing costs by a combined 4 percentage points in a year, its fastest pace on record, but a peak is in sight and the debate is slowly shifting to how long rates would need to be kept at current levels.
“The [ECB] Governing Council’s future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2 percent medium-term target,” the ECB said after lifting the deposit rate by 25 basis points to a 22-year high of 3.5 percent.
Photo: Bloomberg
Policymakers need to reconcile opposing forces.
At 6.1 percent, inflation is already below double-digit readings from autumn last year, and a recession — along with sharply lower commodity prices — would cool price growth quickly over the rest of the year.
However, the labor market remains tight, nominal wage growth is quick and underlying price pressures, particularly for services, appear to be stubbornly high.
Therefore, many policymakers have already put a rate hike on the table for next month, with nearly all saying they were keeping an open mind about September.
“Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labor market for the speed of disinflation,” the ECB added.
Complicating the decision, the US Federal Reserve paused its rate hikes on Wednesday after 10 straight increases, signaling that a global tightening cycle could soon come to an end, even if a little more tightening is still possible.
Prior to yesterday’s decision, markets had priced in another 25 basis point ECB rate hike next month or in September, and there is a moderate chance of another move later this year, perhaps in September or October.
The ECB also announced to end reinvestments in its 3.2 trillion euro [US$3.5 trillion] Asset Purchase Program from next month, a widely expected and long-flagged decision that would catch no investor off-guard.
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