FRANKFURT: The European Central Bank boosted borrowing costs on Thursday to their highest level in 22 years and left the door open to more rises, prolonging its fight against high inflation even as the eurozone economy falters.
The ECB raised its key interest rate, which banks pay to safeguard funds at the central bank, for the eighth time in a row, by 25 basis points to 3.5%, the highest level since 2001. The central bank for the eurozone’s 20 member countries added that it expects inflation to remain over its 2% target until 2025 and hinted at further rate hikes in the following months, Reuters said.
The ECB stated that future decisions will ensure that key ECB interest rates are brought to sufficiently restrictive levels to support a rapid return of inflation to the 2% medium-term target, and that such levels are maintained for as long as necessary.
Growth in the eurozone is at best stagnating and inflation has been moderating for months, courtesy of lower energy prices and the steepest increase in interest rates in the ECB’s 25-year history.
Late on Wednesday, the United States Federal Reserve broke a string of ten consecutive rate hikes, sending a strong signal to investors around the world that the current tightening cycle in developed countries is nearing an end, even if further tightening in the United States is still possible.
However, eurozone inflation remains unacceptably high for the ECB at 6.1%, and the underlying price rise, which normally excludes food and energy, is only now beginning to drop. According to the ECB, the staff has revised up its projections for inflation excluding energy and food, particularly for this year and next, due to previous upward shocks and the implications of a strong labor market for the rate of disinflation.
This was expected to keep the ECB on a tightening path, especially because it failed to foresee the current bout of strong inflation and began hiking rates later than many global peers last year. Before Thursday’s decision, economists polled by Reuters predicted another 25-basis-point deposit rate hike in July, as suggested by a number of policymakers.
While steps beyond July are less likely, ECB President Christine Lagarde is expected to maintain the possibility of another hike in September and to reject investor forecasts that the central bank will lower rates early next year.
