The European Central Bank increased interest rates to a 22-year high in a “marginally doveish” decision which raised hopes that the bloc’s tightening cycle is nearing an end.
The central bank said that inflation continued to decline but was “still expected to remain too high for too long” as it followed the US Federal Reserve in raising its benchmark rate by a quarter-point.
The ninth consecutive increase since last July, when rates were below zero, took the rate to 3.75 per cent, a peak last reached in October 2000.
The ECB governing council said it expected inflation to drop further over the remainder of the year but stay above its 2 per cent target for an extended period.
The euro fell by about 1 per cent against both the dollar and the pound, reversing earlier gains in the aftermath of the decision.
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“Future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2 per cent medium-term target,” the council said.
Christine Lagarde, president of the central bank, told a press conference: “There is the possibility of a hike [next time]. There is the possibility of a pause. It’s a decisive maybe.”
Annual inflation in the eurozone was 5.5 per cent in June, down from 6.1 per cent in May and 8.6 per cent a year earlier, figures from Eurostat showed. Despite that decline, underlying price growth is close to record highs and the labour market remains tight.
Mohit Kumar, chief European economist at Jefferies, described the decision as marginally doveish while Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said the ECB was playing it very safe.
Vistesen said: “This hints that today’s hike could be the last, but it is by no means certain.”
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Marcus Brookes, chief investment officer at Quilter Investors, was more hawkish. “Unfortunately for the ECB, it is far behind the likes of the US in its battle and as such we are likely to see rates continue to go up for the rest of this year,” he said.
“Ultimately, while it has said that its actions will be dependent on the data, it also wants lending conditions to be sufficiently restrictive. We are seeing economies beginning to buckle under this strain. Germany, for example, is facing a recession, while growth in other countries is grinding to a halt.
“As with most monetary policy actions around the world, the ECB is walking a tightrope and will be for a considerable time to come. The uncertain nature of the economic recovery means quality is a crucial factor for investors.”
The yield on two-year German government bonds fell to 3.02 per cent. Short-dated bonds are more sensitive in interest rate move. Money markets were still pricing in a 50 per cent chance of a further quarter-point increase in September.
The rate increase followed a quarter-point rise by the US Federal Reserve to a 22-year high. The Fed raised borrowing costs to a range of 5.25-5.5 per cent in what could be one of the final increases after more than a year of rises to tame inflation.
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Economists polled by Reuters expect UK interest rates to peak at 5.5 per cent with quarter-point increases forecast at the Bank of England’s meetings next Thursday and in September. Expectations for a bigger rate increase have eased after latest data showed inflation fell to 7.9 per cent in June.
