European Central Bank raises rates again

The European Central Bank kept up its aggressive efforts to fight inflation Thursday, raising rates by half a percentage point to the highest since 2008 and all but promising another half-point increase in March.

Even though the eurozone’s overall inflation rate appears to have peaked, Christine Lagarde, the president of the bank, spoke firmly about the ECB’S commitment to stamping out persistent inflationary pressures.

“We know that we have ground to cover,” she said. “We know that we are not done.”

After an initial slow start responding to a steady climb in inflation last year, the central bank began raising interest rates in July. Since then, it has undertaken the fastest pace of monetary tightening in its two- decade history.

But after the move Thursday, investors are betting that an end is in sight. European bonds rallied, with their yields falling sharply, as analysts forecast that the ECB would raise interest rates only a few more times.

Traders had similar reactions after rate increases by the U.S. Federal Reserve on Wednesday and the Bank of England on Thursday, even though the ECB has not raised rates as much as those two banks.

“The situation is very different from one country to the other, but there are common trends here, which is basically that we are closer to the peak for interest rates,” said Frederik Ducrozet, the head of macroeconomic research at Pictet Wealth Management.

The central bank raised its deposit rate to 2.5% Thursday, and markets are betting the peak will be about 3.3%. The yield on 10year Italian bonds fell 0.4 percentage points to 3.89%, the steepest drop in yields since March 2020, and the yield on 10-year German bonds fell about 0.2 percentage points to 2.07%.

Recent data suggested inflation peaked in the eurozone in October, at 10.6%, but policymakers Thursday insisted that the battle against high inflation in the region still has not been won. On Wednesday, data showed that the annual rate of inflation in the eurozone fell to 8.5% in January, from 9.2% the previous month.

In several European countries, including France and Spain, the rate of inflation rose in January. Core inflation, a measure closely watched by policymakers because it indicates how deeply rising prices are embedded in the economy, remains stubbornly high. In January, the annual rate of core inf lation, which excludes food and energy prices, was 5.2%, holding steady at a record high.

The ECB said in a statement that it would “stay the course in raising interest rates significantly at a steady pace.”

“Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations,” the statement said.

Europeans face tight financial conditions, but the region has been surprisingly resilient to recent economic turmoil, even as the war in Ukraine continues into a second year. Data published Tuesday showed that the countries that use the euro had forestalled a recession late last year, and other economic indicators suggest the outlook is brighter than expected just a few months ago, in large part because natural gas prices have come down from their peak in August.

Still, significant risks remain, particularly from persistent inflationary pressures.

A recession may be avoided this year, but the eurozone is likely to experience a sharp economic slowdown as the effects of higher interest rates constrain the economy and inflation eats away at household budgets.

The ECB’S action came nearly an hour after the Bank of England raised its benchmark rate a halfpoint, to 4% — its highest level since October 2008. On Wednesday, the U. S.

Federal Reserve raised rates a quarter-point, to a range of 4.5% to 4.75%. It was the Fed’s eighth increase in a year but the smallest since March, as officials said that inflation had finally started to ease meaningfully and that the global economy was less imperiled than it seemed last year.

Lagarde, the ECB’S president, stressed at a news conference Thursday that the ECB remained resolved to raise interest rates to the point where they would restrain economic activity and, “once we are there, stay sufficiently” so interest rates return inflation to 2% in the medium term.

The challenge policymakers around the world face this year is determining when to halt rate increases without prematurely appearing to declare victory in their fight against inflation. There are signs that inflation has peaked in the United States, Britain and many eurozone economies. At the same time, central banks are aware of the lag effect in monetary policy, which means much of the effect of last year’s rate increases still haven’t been felt in the economy. Traders are now betting that most major central banks will only raise rates a few more times this year.