The European Central Bank on Thursday raised interest rates to its highest level in more than 20 years as policymakers continued their campaign to curb inflation, which they expect will remain too high for a long time.
The bank, which sets interest rates for 20 countries that use the euro currency, raised interest rates by a quarter percentage point to 3.5% on deposits, the highest since 2001. It was the eighth consecutive increase by the bank. The move has been widely publicized since the last Governing Council meeting in early May, when policymakers expressed concern about potential inflationary pressure from rising wages and corporate profits, or the impact of higher food prices.
“Inflation is declining, but we expect it to remain too high for a long period of time,” the bank’s governor, Christine Lagarde, told reporters on Thursday.
The decision came a day after the Federal Reserve kept interest rates unchanged for the first time in over a year. After last month’s mirror move of both central banks raising rates by a quarter of a percentage point, the central banks are starting to diverge again, in part because the European Central Bank has not hiked rates as long or as high as the Fed. .
Policymakers have said that even though annual inflation in the euro area fell from a double-digit peak at the end of last year to 6.1% in May, the slowest pace in years, prices were likely to rise. He wants to avoid the risk of prematurely declaring victory in battle. one year. Much of the slowdown is likely due to lower wholesale energy costs, but central bankers are wary of signs that inflation is being baked into the economy, preventing inflation from returning to its 2% target. there is a possibility.
The central bank expects inflation to average 5.4% this year, but expects inflation to remain above target at 2.2% two years from now. percent, up slightly from the previous forecast set three months ago.
But as inflation slows, the question of how much policy tightening is appropriate becomes harder to determine.too much It could unnecessarily constrain the economy, triggering or exacerbating a recession. Too little and inflation can become a persistent problem that policymakers cannot eradicate. This is the challenge facing central bankers around the world.
The Fed on Wednesday said it was holding off on rate hikes, giving it time to assess how the economy is responding to the rapid pace of rate hikes in the past. But policymakers warned that another rate hike could be needed in the future. Such a pattern was recently established in Australia and Canada, where central banks left rates on hold for short periods before resuming rate hikes.
In May, the European Central Bank slowed the pace of rate hikes, acknowledging that its tight monetary policy was hurting the region’s economy by making banks’ lending terms tougher. The bank said on Thursday it expected demand to become increasingly subdued due to tighter lending terms.
The central bank hinted at higher interest rates and slightly lowered its economic growth forecast for this year and next, forecasting growth of 0.9% this year and 1.5% this year. The euro zone plunged into recession earlier this year as high prices kept people from spending.
“Future decisions by the Governing Council will ensure that the ECB’s key interest rate is lowered to a level sufficiently restrictive to bring inflation back to its 2% medium-term target in a timely manner,” the bank said in a statement. . at that level for as long as necessary. “
