ECB raises rates again and plans at least one more hike
THE European Central Bank (ECB) raised interest rates again by another half a percentage point on Thursday (Feb 2) and pencilled in at least one more hike of the same magnitude next month.
The ECB has been increasing rates at a record pace to fight a sudden bout of high inflation in the eurozone – the result of factors such as the aftermath of the Covid-19 pandemic and an energy crisis that followed Russia’s invasion of Ukraine.
The central bank for the 20 countries that share the euro raised the rate it pays on bank deposits to 2.5 per cent, in line with what it said in December and with market expectations.
Crucially, it said the next rate increase would be of the same size.
“There was general agreement on the fact that the 50 basis points this time around and the 50 basis points in March were legitimate on the basis of, particularly in March, of the underlying inflation pressure that we know will continue,” ECB President Christine Lagarde added at a news conference after the policy meeting.
Before the decision, investors and economists were expecting the ECB to raise its deposit rate by another 50 basis points in March and take it to a peak of 3.25 per cent/3.50 per cent by the summer, which would be the highest since the turn of the century.
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On Wednesday, the US Federal Reserve slowed the pace of its own hikes and acknowledged that disinflation was underway, while reaffirming that borrowing costs still needed to rise further.
The recent economic data out of the eurozone had painted a mixed picture.
Headline inflation has been in rapid decline since peaking at a record 10.6 per cent in October but core prices, which exclude volatile items such as food and fuel, have been rising at a steady or accelerating pace.
The eurozone unexpectedly eked out growth in the final three months of 2022 but this was largely due to an exceptionally mild winter and a stellar performance by Ireland.
And an ECB survey showed that banks were tightening access to credit by the most since the 2011 debt crisis – usually the harbinger of lower growth and slowing inflation.
In December, the ECB said rates would be increased “at a steady pace” until it was happy inflation was heading back down to its 2 per cent target.
But that guidance has since become a source of confusion for investors and contention within the Governing Council, as headline inflation fell sharply while underlying price growth was still inching up.
Policy hawks who favour higher rates, such as the Netherlands’ Klaas Knot, Slovakia’s Peter Kazimir and Slovenia’s Bostjan Vasle, have explicitly called for a 50-basis-point hike in March too.
But doves, such as Greece’s Yannis Stournaras and Italian board member Fabio Panetta, have argued for smaller moves, or at least for the ECB to refrain from making commitments for March.
Overall, Lagarde believes that the EU economy has proved more resilient than expected and should recover over the coming quarters. REUTERS
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