The European Central Bank raised interest rates by half a percentage point on Thursday and pledged to do the same in March, as its president Christine Lagarde warned that eurozone inflation remained “far too high”.
The ECB resolved to press on with aggressive tightening after it raised the benchmark deposit rate to 2.5 per cent, saying in its post-meeting statement it would “stay the course”, raising rates “at a steady pace”. It confirmed that it intended another half-point rise to follow at its next monetary policy meeting, set for March 16.
“We know we have ground to cover, we know we are not done,” Lagarde told a post-decision press conference, adding that rate-setters already had enough evidence to be confident that a further significant rate rise would be needed. “Inflation remains far too high,” she said, adding that the disinflation process in the eurozone had not yet started.
The bank’s commitment to keep on with significant rate rises sets it apart from its UK and US counterparts, which have signalled this week that interest rates are close to their peak.
The ECB’s move followed a half-point increase by the Bank of England earlier on Thursday and a quarter-point rise on Wednesday by the US Federal Reserve. However, the Fed has slowed the pace of tightening on signs that some price pressures in the US are dissipating, with chair Jay Powell offering hope this week that inflation could return to the central bank’s 2 per cent target without “a really significant economic decline”. The BoE also hinted that it might now have reached the peak in interest rates at 4 per cent.
The eurozone’s central bank has so far increased borrowing costs by 3 percentage points since it began raising rates — a smaller amount than the UK and US central banks.
After March, the ECB said it would “evaluate the subsequent path of its monetary policy”, which some market participants took as a dovish message, suggesting that interest rates could be nearing a peak.
The euro fell 0.89 per cent against the dollar to $1.088 by mid-afternoon, while in fixed income markets, the 10-year German Bund yield, a regional benchmark, dropped 0.2 percentage points to 2.09 per cent. The yield on the equivalent Italian government bond tumbled 0.36 percentage points to 3.92 per cent. Bond yields fall as prices rise.
But Lagarde made it clear that, while the pace of rate increases could slow from May onwards, it was unlikely that the ECB would be ready to pause by then.
“The question is how much to hike further beyond March, not whether to hike further,” said James Rossiter, head of global macro strategy at TD Securities.
The decision is in line with the hawkish rhetoric adopted by Lagarde since December. Since then, the eurozone economy has proved more resilient than expected, aided by warmer weather and government support to help households and businesses cope with soaring energy bills.
While stronger growth is welcomed by policymakers, it will make it harder for them to tame underlying price pressures and return inflation to their 2 per cent goal.
Data published this week showed the headline rate of inflation fell more than expected, from 9.2 per cent in the year to December to 8.5 per cent last month. But eurozone core inflation — which excludes changes in food and energy prices, and is seen as a better indicator of longer-term price pressures — was unchanged at an all-time high of 5.2 per cent.
Alongside the decision on interest rates, the ECB set out further details of its plans to begin shrinking its balance sheet from next month by buying fewer bonds from the proceeds of the maturing securities it owns.
It aims to reduce its portfolio by €15bn per month from March until the end of June, with partial reinvestments conducted broadly in line with current practice. For corporate bond purchases, however, reinvestments would be “tilted more strongly towards issuers with a better climate performance”, the ECB said.