Please register to access this content.
To continue viewing the content you love, please sign in or create a new account
Dismiss
This content is for our paying subscribers only

Business Economy

ECB raises rates to 22-year high, signals more to come

Central bank raises rate by 25 basis points to 3.5 per cent



The debate is slowly shifting to how long rates will need to be kept at current levels.
Image Credit: Shutterstock

Frankfurt: The European Central Bank raised interest rates for the eighth successive time as expected on Thursday and signalled further policy tightening as it battles high inflation.

The ECB has now increased borrowing costs by a combined 4 percentage points in a year, its fastest pace on record, but a peak is now clearly in sight and the debate is slowly shifting to how long rates will need to be kept at current levels.

“The Governing Council’s future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2 per cent medium-term target,” the ECB said after lifting the deposit rate by 25 basis points to a 22-year high of 3.5 per cent.

At 6.1 per cent, inflation is already well below double-digit readings from last autumn and a recession, along with sharply lower commodity prices, will cool price growth quickly over the rest of the year.

But the labour market remains tight, nominal wage growth is quick and underlying price pressures, particularly for services, appear to be stubbornly high.

Advertisement

This is why a long list of policymakers have already put a July rate hike on the table, with nearly all also saying they were keeping an open mind about September.

“Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation,” the ECB added.

Complicating the decision, the US Federal Reserve paused its rate hikes on Wednesday after 10 straight increases, signalling that a global tightening cycle could soon come to an end, even if a little more tightening is still possible.

Prior to Thursday’s decision, markets had priced in another 25 basis point ECB rate hike in July or September and saw a moderate chance of another move later this year, perhaps in September or October.

The ECB also decided on Thursday to end reinvestments in its 3.2 trillion euro Asset Purchase Programme from July 1, a widely expected and long-flagged decision that will catch no investor off-guard.

Advertisement