ECB raises rates again, but only a quarter point
The European Central Bank raised interest rates by a quarter of a percentage point Thursday, slowing down the pace of its monetary policy tightening even as it signaled that the fight against inflation was not complete.
The quarter-point move is the smallest increase that policymakers have imposed since they started raising rates last summer, in what has become the fastest pace of tightening in the bank’s two-decade history. It comes as the bank acknowledged the impact that past rate increases are now having across the eurozone.
The central bank is slowing its campaign even though the inflation rate for the eurozone edged higher in April, with prices rising 7 percent from the year before, according to data published Tuesday. The annual inflation rate was 6.9 percent in March.
Still, within the inflation report were some signals that support a slowdown in policy tightening. The headline rate of inflation has dropped from its peak of 10.6 percent in October, and last month the core rate, which excludes energy and food prices, was slightly lower at 5.6 percent.
Policymakers are closely watching measures of so-called underlying inflation that signal how much inflationary pressure is being generated within the region’s economy, such as through wage growth or companies raising prices to maintain profit margins, as opposed to being imported in through higher energy costs.
“The inflation outlook continues to be too high for too long,” the central bank said in a statement Thursday. It went on to say that “headline inflation has declined over recent months, but underlying price pressures remain strong.”
Policymakers also justified the smaller interest rate increase by pointing to evidence that past policy tightening was starting to have an impact as demand for loans dropped earlier this year and banks have substantially tightened the criteria they use to approve loans to households and businesses. Deteriorating lending conditions tend to lead to a slowdown in the economy, which would weaken inflation.
“The past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain,” the bank said.
The central bank, which sets interest rates for the 20 countries that use the euro, started raising interest rates in July for the first time in a decade as energy prices soared and inflation climbed across the bloc. Since then, policymakers have increased rates by either half or three-quarters of a percentage point as they sought to quickly switch from the bank’s very accommodative policy stance in the wake of the coronavirus pandemic. The bank’s deposit rate, which is what banks receive for depositing money with the central bank overnight, was raised to 3.25 percent Thursday, from minus 0.5 percent in July.