The European Central Bank lifted interest rates by a half-point and pledged another such move before officials then take stock of where borrowing costs must go to tame inflation.
(Bloomberg) — The European Central Bank lifted interest rates by a half-point and pledged another such move before officials then take stock of where borrowing costs must go to tame inflation.
Policymakers, as expected, raised the deposit rate to 2.5%, the highest since 2008. They warned that the most aggressive bout of monetary tightening in ECB history isn’t done — even as energy prices plunge and the Federal Reserve moderates the pace of its own hikes.
“The Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March,” the ECB said in a statement. “It will then evaluate the subsequent path of its monetary policy.”
The move effectively locks in an increase in rates, while allowing for a potential pause if deemed appropriate due to improving economic conditions. President Christine Lagarde will hold a news conference at 2:45 p.m. in Frankfurt to elaborate on the ECB’s decision.
- Follow the ECB TLIV blog here
The euro fell after the ECB’s decision, trading down 0.2% to around $1.097. Money markets added to bets for a half-point increase in March though trimmed wagers on the peak of the tightening cycle to below 3.5%.
Alongside its commitment on rates, the ECB also gave more details on how it intends to shrink its €5 trillion ($5.4 trillion) bond portfolio, reaffirming a monthly cap of €15 billion between March and June on maturing debt that’s allowed to expire.
Read more: ECB Publishes More Details of Quantitative Tightening Plan
Thursday’s announcement follows a slew of encouraging economic data, showing a further retreat in inflation and receding chances of a recession in the 20-member euro zone — despite the war still raging on its doorstep.
It’s been a busy week for central banks. As well as Wednesday’s decision by the Fed to lift rates by a smaller, quarter-point increment, the Bank of England delivered another half-point hike earlier today.
Even after a steeper-than-anticipated slowdown in January, euro-area inflation — at 8.5% — remains more than four times the ECB’s 2% target. What’s more, a measure of underlying price pressures is stuck at a record.
Stubborn core inflation has prompted hawks like Netherlands central bank chief Klaas Knot and Austria’s Robert Holzmann to speculate whether half-point steps should persist into the second quarter — especially as higher borrowing costs are yet to hurt the economy noticeably.
But doves on the Governing Council, who include Italy’s Ignazio Visco and Greece’s Yannis Stournaras, are signaling a preference for more gradual steps, starting as early as March.
They can point to a warm weather-induced drop in natural gas prices, which spiked after Russia invaded Ukraine. The recently announced pause in the Bank of Canada’s tightening cycle gives them further ammunition.
Lagarde said in the run-up to this week’s meeting that her mantra for the ECB was “staying the course,” and economists see more to come.
A survey by Bloomberg last month foresees hikes of 50 and 25 basis points for March and May. That would take the deposit rate to 3.25%, where the analysts reckon it will stay until mid-2024.
–With assistance from Jasmina Kuzmanovic, Alexander Pearson, Angela Cullen, Alexey Anishchuk, Christoph Rauwald, Laura Malsch, Bryce Baschuk, James Regan, William Horobin, Alessandra Migliaccio, Ben Sills, Joel Rinneby, Kristian Siedenburg, Jeremy Diamond and Greg Ritchie.
(Updates with more from statement starting in first paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.