European Central Bank raises rates for a 10th time
THE European Central Bank on Thursday (Sep 14) raised interest rates for a 10th consecutive – and perhaps final – time in the bank’s effort to force inflation down.
The bank lifted its three key interest rates by a quarter of a percentage point, raising the deposit rate to 4 per cent, the highest in the central bank’s two-decade history.
“Inflation continues to decline but is still expected to remain too high for too long,” Christine Lagarde, the president of the bank, said on Thursday. Policymakers increased rates to “to reinforce progress” on reining in inflation, she said.
But in a signal that the latest increase may be the final one, Lagarde said she and her fellow policymakers consider that “interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”
Thursday’s decision was seen as almost a coin toss, as the policymakers weighed how much progress had been made on lowering inflation against their determination not to declare victory too early. As the meeting approached, bets by investors in financial markets tilted toward a slightly higher chance that the bank would raise rates rather than keep them steady.
Inflation in the eurozone has slowed meaningfully from its double-digit peak last year. During that time, the central bank has embarked on its most aggressive period of monetary policy tightening, raising rates from negative levels in July last year to a record high.
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But inflation remains still too high for the region’s policymakers, who are tasked with returning the inflation rate to 2 per cent. Consumer prices rose 5.3 per cent in August compared with a year earlier, the same pace as the previous month and defying economists’ expectations for a slowdown because of a jump in fuel prices.
At the same time, domestic inflationary pressures, which policymakers are watching closely, were still strong. Core inflation, which strips out food and energy prices, was 5.3 per cent.
On Thursday, the central bank published new economic projections by its staff, which said that inflation would be slightly higher this year and next than forecast three months ago because of higher energy prices.
In 2025, inflation would be just above the bank’s target, and so policymakers have tried to lay the ground for a long period of high interest rates that would restrain the economy further. Already, demand for loans has weakened and banks are tightening their lending standards.
Previous rate increases were being “transmitted forcefully” into the economy, Lagarde said in a news conference in Frankfurt, Germany. “Financing conditions have tightened further and are increasingly dampening demand, which is an important factor in bringing inflation back to target.”
And so, the bank also downgraded its forecasts for economic growth over the next three years, with the economy growing just 0.7 per cent this year.
Earlier this week, the European Commission cuts its forecasts for the region’s economy, projecting that the eurozone would grow 0.8 per cent this year, down from a forecast of 1.1 per cent made four months ago. The economy would also grow more slowly next year.
Germany, the region’s largest economy, is stagnant as its industrial sector suffers under the weight of high interest rates and other costs. Last month business activity fell at its fastest rate in more than three years.
Amid this deteriorating economic outlook, traders are betting that the central bank will start to cut interest rates around the middle of next year.
Interest rates will be set at “sufficiently restrictive levels for as long as necessary” in the future, Lagarde said, reiterating that decisions will be made depending on the latest economic and financial data, inflation measures that capture domestic price pressures, and the strength of monetary policy’s impact on the region’s economy. NYTIMES
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