ECB raises interest rates to highest level since euro launched
The European Central Bank has raised interest rates to the highest level since the launch of the euro to tackle stubbornly high inflation, despite fears over a slowdown across the single currency bloc.
It marks the 10th consecutive rate rise for the bank, as the ECB warned inflation remained too high even as the impact of previous increases and a weakening outlook for global trade weigh on the eurozone economy.
The latest increase pushes the ECB’s deposit rate, which is paid on commercial bank deposits, from 3.75% to 4% – the highest since the euro was launched in 1999. Its main refinancing operations, which provide the bulk of liquidity to the banking system, was increased from 4.25% to 4.5%.
The marginal lending facility, which offers overnight credit to banks, was also increased by a quarter-point to 4.75%.
The decision comes as global investors predict the world’s most powerful central banks are close to the end of the most aggressive rate-hiking cycle in decades after inflation surged after the Covid pandemic and the Russian invasion of Ukraine.
Economists anticipate one further increase from the Bank of England when its policymakers meet next week, and expect the US Federal Reserve to leave borrowing costs unchanged despite an uptick in inflation last month driven by higher energy costs.
European stock markets rose on Thursday on hopes that rate hikes were coming to an end. The FTSE 100 had its best day of 2023, gaining almost 2%.
Christine Lagarde, the ECB president, hinted that rates may have peaked, while suggesting borrowing costs would remain high for as long as necessary to bring inflation down to the central bank’s 2% target.
“Based on its current assessment, the governing council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” she said.
Inflation across the eurozone remains stuck above 5%, while the ECB forecast it would drop to 3.2% in 2024 – higher than previously anticipated – before a drop to 2.1% in 2025.
However, households across the region are coming under pressure from previous increases in borrowing costs, while the eurozone grapples with a downturn in global trade. The European Commission warned on Monday the German economy – the largest in the region – would shrink this year as part of a wider eurozone slowdown.
The ECB revised down its growth forecasts, cutting its projection for growth of 0.9% this year to 0.7%, and from 1.5% to 1% for 2024.
Seema Shah, chief global strategist at Principal Asset Management, said the revised forecasts laid bare a tough dilemma for the central bank. “While this confusing picture set the backdrop for what was probably a heated debate within the governing council, future decisions will likely be more clear cut.
“Although the ECB has left the door slightly ajar for further tightening, the fact that recession risks are rising once again likely means that this is the final hike.”