ECB raises rates to 22-year high, in no mood to pause
Frankfurt, June 15, 2023
ECB raises rates for 8th straight time; Lagarde says July hike highly likely
The European Central Bank raised borrowing costs to their highest level in 22 years on Thursday and left the door open to more hikes, extending its fight against inflation that remains stubbornly high even as the euro zone economy flags.
The ECB increased its key interest rate--the one banks pay to park cash securely at the central bank--for the eighth consecutive time, by 25 basis points to a 22 year-high of 3.5%.
“The key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary,” ECB President Christine Lagarde said at a press conference following the decision.
The central bank for the 20 countries that share the euro also said it expected inflation to stay above its 2% target through 2025 and hinted once again at more rate hikes in the coming months.
It raised its 2023 and 2024 projections for “core” inflation, excluding volatile energy and food, which the ECB watches closely.
Lagarde said wage rises and companies pushing up prices to increase their profits are becoming an increasingly important driver of inflation.
“Inflation has been coming down but is projected to be too high, for too long,” she said.
The ECB's latest hike followed Wednesday's first pause in U.S. rate rises in over a year--a signal to investors around the world that the current tightening cycle across developed economies is nearing an end, even if a little more U.S. tightening is still possible.
Euro zone inflation has been moderating for months, courtesy of lower energy prices and the steepest increase in rates in the ECB's 25-year history, but remains unacceptably high for the ECB at 6.1%, with underlying price growth only starting to slow.
Growth, meanwhile, is at best stagnating.
The upwards revision to inflation forecasts for this year, the next and 2025--when it was still expected to remain above the central bank's target, at 2.2%--surprised economists.
Euro zone government bond yields and the euro rose as traders bet on higher interest rates.
“Barring a material change to our baseline, it is very likely the case that we will continue to increase rates in July,” Lagarde said. “We are not thinking about pausing, as you can tell.”
While signs that economic growth is slowing would normally augur a pause, the ECB has been taking its own projections with a pinch of salt after years in which they missed the mark.
Instead, rate-setters have focused on actual economic data that have been painting a mixed picture.
Two quarters of contraction in industrial powerhouse Germany dragged the euro zone into a shallow recession last winter and the economy is likely to eke out only modest growth this year.
But unemployment is at record lows and wage growth is picking up, even if it still lags inflation.
Headline price growth has been falling fast after hitting double-digits late last year. But underlying prices, most notably for services, have yet to show the decisive drop ECB policymakers have said they would need to see before taking their foot off the monetary brake.
Higher borrowing costs are curbing demand for credit from households and companies as well as banks' willingness to lend, but consumption is holding up well in nominal terms.
“The Governing Council’s past rate increases are being transmitted forcefully to financing conditions and are gradually having an impact across the economy,” Lagarde said.
While the opposing factors are likely to have provided ammunition to both sides of the ECB's Governing Council--the hawkish majority that has been pushing for more rate hikes remain in the driving seat.
“Are we done? Have we finished the journey? No. We’re not at our destination. Do we still have ground to cover? Yes, we still have ground to cover,” Lagarde said.
[The Hindu]
