ECB opens door to pause in rate hiking campaign

ecb opens door to pause in rate hiking campaign
AFP

The European Central Bank lifted a key interest rate to its highest level since early 2001 on Thursday as it fights stubborn inflation but opened the door to pausing its aggressive rate hiking campaign.

The institution increased its main rates a quarter percentage point, taking its benchmark deposit rate to 3.75 percent — its highest level since May 2001 and equal to its previous record high.

Borrowing costs have risen at their fastest pace ever in the bank’s year-long hiking cycle to fight inflation.

In all, key rates have risen by 4.25 percentage points since the ECB made its first move in July last year after Russia’s invasion of Ukraine sent prices for energy and food soaring.

While inflation has come down from its double-digit peak at the end of last year, the price gauge was still expected to remain “too high for too long”, ECB President Christine Lagarde said at a press conference.

Consumer prices in the eurozone rose at 5.5-percent pace in June — still well above the ECB’s two-percent target.

But Lagarde said the ECB would keep an “open mind” when it came to future rate decisions — a marked departure from her past hawkish tone, which analysts said opened the door for a potential pause at the central bank’s next meeting in September.

‘Data dependent’

The ECB was “moving to a stage where we are going to be data dependent”, Lagarde said, pointing to new projections to be released alongside the bank’s next meeting in September.

“On the basis of that, we will determine whether we hike or whether we pause,” Lagarde said.

Commenting after Lagarde’s remarks, Jens-Oliver Niklasch from LBBW bank said: “Another rate hike is not off the table, but a little less likely today than yesterday.”

The ECB decision came a day after the US Federal Reserve resumed its own hiking cycle with a quarter-point raise, following a decision to pause in June.

The US central bank signalled it could raise rates again if inflation proved stubborn.

In the eurozone, “some measures show signs of easing”, the ECB said, but stressed that “underlying inflation remains high overall”.

Core inflation — a closely watched measure that excludes volatile energy, food, alcohol and tobacco prices — in fact rose to 5.4 percent in the eurozone in June, from 5.3 percent in May.

At the same time, there were factors that could drive inflation higher. Russia’s exit from a landmark deal for the export of grain from Ukraine could push up food prices and posed an “upside risk” to inflation, Lagarde warned.

Officials at the Frankfurt-based central bank were also worried about the impact higher salaries might have on overall prices.

“Domestic price pressures, including from rising wages and still robust profit margins, are becoming an increasingly important driver of inflation,” Lagarde said.

‘Deteriorated’

Meanwhile, high inflation meant that the “near term economic outlook for the euro area has deteriorated”, Lagarde said.

The currency bloc was in recession around the turn of the year, after the economy shrank in two straight quarters.

A series of pessimistic economic indicators have added to concerns that the eurozone could face a protracted period of sluggish growth.

The ECB risked being “too benign on the economic impact of its own policy measures”, as interest rate hikes put the brakes on the economic activity, said Carsten Brzeski, head of macro at ING bank.

Lagarde’s talk of persistently high inflation did not suggest the ECB was “yet willing to stop hiking rates”, Brzeski said, but “the worsening macro outlook seems to have scared off some ECB members”.

A pause at the ECB’s next meeting in September was “a possibility”, but only a very sharp deterioration in the outlook for the economy would stop the bank from “hiking rates at least once more after today”, he said.

Authored by Afp via Breitbart July 27th 2023