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

THE European Central Bank (ECB) raised interest rates for the eighth successive time as expected on Thursday (Jun 15) and signalled further policy tightening, as it battles high inflation.

“Barring a material change to our baseline, it is very likely the case that we will continue to increase rates in July, which probably doesn’t come as a surprise,” said ECB president Christine Lagarde after the bank’s policy meeting.

“Are we done? Have we finished the journey? No.”

“Do we still have ground to cover? Yes,” she told reporters.

“Conditions in different sectors of the economy are uneven. Manufacturing continues to weaken, partly owing to lower global demand and tighter euro area financing conditions, while services remain resilient,” added Lagarde.

The ECB has now increased borrowing costs by a combined four 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.

Policymakers need to reconcile opposing forces.

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.

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No pause in sight as ECB eyes next rate hike

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

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 (S$4.6 trillion) Asset Purchase Programme from Jul 1, a widely expected and long-flagged decision that will catch no investor off-guard. REUTERS