European Central Bank hikes interest rates to highest level in 22 years

The European Central Bank raised interest rates by a quarter of a percentage point Thursday and signaled another hike to come next month, unmoved by evidence of a mild recession in the 20 countries that use the euro.

The ECB has now hiked rates at eight consecutive meetings since July in a fight against inflation. The latest move takes the benchmark rate in the euro area to 3.5%, the highest since May 2001.

The central bank diverged from the US Federal Reserve, which opted to pause its historic rate-hiking campaign Wednesday after 10 successive increases.

ECB President Christine Lagarde said another rate hike in July was “very likely.”

“We are not thinking about pausing,” she told reporters, echoing her previous remarks that the central bank still had “ground to cover” to make interest rates sufficiently restrictive.

The ECB also said in a statement: “Inflation has been coming down but is projected to remain too high for too long.”

Consumer prices in the euro area rose 6.1% in May compared with a year ago — the lowest level since Russia launched its full-scale invasion of Ukraine, sending global energy prices soaring.

Although inflation has eased, it remains well above the ECB’s 2% target and there are growing concerns about the persistence of certain price pressures.

Pay raises a worry

The central bank revised upward its forecast for core inflation, which strips out volatile food and energy prices, noting “upward surprises” and a “robust labor market.”

Core inflation is expected to reach 5.1% this year, up from an average of 4.6% forecast in March.

Lagarde said pay raises were the main driver behind this new forecast, with average wages growing 5.2% in the first quarter from a year prior. Output, meanwhile, remained broadly stagnant, pushing up the cost per worker and leading firms to charge higher prices.

Euro area unemployment reached a historic low of 6.5% in April. Lagarde said ECB policymakers had discussed the labor market in depth at their meeting and would continue to monitor developments closely.

Despite a tight job market, rising prices and higher interest rates are increasingly taking a toll on the region’s economy, which contracted slightly around the turn of the year.

The ECB now expects the economy to grow 0.9% this year, a marginal downgrade from its forecast in March.

It said past rate increases were “gradually” being felt across the economy. “Borrowing costs have increased steeply and growth in loans is slowing.”

That could bolster the case for the central bank to pause interest rate hikes soon.

But the ECB now expects inflation to remain higher for longer, leaving open the possibility of rate hikes beyond July.

“The president did not today speak like a central banker who is about to deliver her final rate hike next month, repeating the line that the ECB ‘has more ground to cover’,” Claus Vistesen, chief euro area economist at Pantheon Macroeconomics, said in a note.

“We now think the ECB will deliver two more 25-basis-point hikes, in July and September, taking the deposit rate to 4%, which we think will be the terminal rate.”

Source:CNN