The European Central Bank had a clear message as it raised interest rates by a quarter of a percentage point on Thursday: It’s not done yet.
Even as the central bank, which sets interest rates for the 20 countries using the euro, slowed the pace of its monetary tightening, Christine Lagarde, the bank’s president, made clear the fight against inflation was not complete.
“We’re not stopping, that’s very clear,” Lagarde told reporters in Frankfurt on Thursday. “We know we have more ground to cover.”
The quarter-point move is the smallest hike policymakers have imposed since they began raising interest rates last summer, a campaign of seven consecutive increases, which has become the fastest pace of tightening in the bank’s two-decade history. The downward turn came on Thursday as the Bank acknowledged the impact that previous rate hikes are now having across the Eurozone.
But the insistence that the ECB was not ready to halt the rate hike cycle followed speculation that other major central banks, notably the Federal Reserve and the Bank of England, were much closer to halting interest rate increases. On Wednesday, the Federal Reserve raised interest rates by a quarter of a point, bringing them above 5 percent for the first time since mid-2007, while signaling that future increases were no longer certain.
“Inflation expectations remain too high for too long,” Lagarde said Thursday in the Eurozone. “Headline inflation has fallen over recent months, but core price pressures remain strong.”
Data published earlier this week showed that the rate of inflation in the eurozone rose higher in April, with prices rising 7 percent from a year earlier. The annual inflation rate was 6.9 percent in March.
However, in the inflation report there were some signs supporting a slowdown in policy tightening and analysts’ expectations that the central bank is nearing the end of this cycle of rate hikes. Headline inflation has fallen from a peak of 10.6% in October, and last month the core rate, which excludes energy and food prices, was slightly lower at 5.6%.
Policymakers closely watch measures of so-called core inflation that indicate how much inflationary pressure is being created within a region’s economy, such as wage growth or companies raising prices to maintain profit margins, rather than importing through higher energy costs.
“The fact that the ECB has once again slowed the pace of increases indicates that the peak is not far away,” Holger Schmieding, economist at Berenberg, wrote in a note. He predicted two more quarter-point increases.
Policymakers also highlighted the growing body of evidence that past interest rate increases have an impact on financial conditions, justifying a smaller interest rate move. Demand for loans fell earlier this year and banks have dramatically tightened the criteria they use to approve loans to households and businesses. deteriorating credit conditions They tend to lead to a slowdown in the economy, which dampens inflation.
“Past price increases are being strongly channeled into euro area financing and monetary conditions,” Lagarde said. It remains uncertain how much this will affect the non-bank economy, but it added that the “notable slowdown in bank lending” should reduce price pressures more than expected.
The central bank began raising interest rates last July for the first time in a decade as energy prices soared and inflation soared across the bloc. Since then, policymakers have raised interest rates by a half or three-quarters of a percentage point as they sought to shift quickly from the bank’s highly accommodative policy in the wake of the coronavirus pandemic. The interest rate on bank deposits, which is what banks receive for depositing money with the central bank overnight, was raised to 3.25 percent on Thursday, from negative 0.5 percent last July.
Even as inflation peaked in the US and Europe, policymakers were keen to keep their options open about their next moves. Traders are betting that rate hike cycles are almost over, and some analysts have raised concerns about higher rates It could go too far and do unnecessary harm to economies around the world. But policymakers said they wanted to see hard evidence that domestic inflation pressures have eased enough for inflation to return to its 2 percent target.
“All conservatives are determined to fight inflation, tame inflation and bring it back to 2 percent over the medium term,” Lagarde said.
She added that future decisions of the 26-person board of directors would ensure this Rates would be “raised to sufficiently restrictive levels” to bring inflation back to target and “kept at those levels for as long as necessary”. But she did not provide exact details of what would happen next, stressing instead that every decision is made based on the latest economic and financial data.
“This is a hiking trip we’re doing,” she added.
When the European Central Bank last set interest rates, in mid-March, financial markets were gripped by interbank turmoil, after two US banks failed, and Swiss lender Credit Suisse, under pressure, was bought out by rival UBS.
At the time, Lagarde said that if banking uncertainty fades, and the central bank’s inflation forecast remains unchanged, policymakers will need to continue raising interest rates. Despite the collapse of a third US bank, the First Republic, this week, banks in the eurozone have been spared the market turmoil which has left room for the central bank to continue raising interest rates.
The European Central Bank also said it expects to contract further Bond holdings as it tightened its political stance. From July, it will stop reinvesting proceeds from maturing assets purchased under its larger bond-buying programme, which had about 3.2 trillion euros ($3.5 trillion) in assets at the end of April. In the past, bonds, mostly government debt, were bought to encourage banks to do more lending and investments and to generate more economic activity.
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