European Central Bank Raises Rates Again, but Only a Quarter Point

The slowdown in monetary tightening comes as traders bet other major central banks, notably the Federal Reserve and the Bank of England, are very close to pausing rate hikes. On Wednesday, the Federal Reserve raised interest rates by a quarter of a percentage point, taking him above 5% for the first time since mid-2007, indicating future rate hikes are no longer certain.

Even as inflation peaked in the US and Europe, policy makers have been careful to remain open about their next move. Traders are betting that the rate hike cycle is almost over, with some analysts expressing concern that rate hikes could go too far and cause unnecessary damage to economies around the world. But policymakers are waiting for hard evidence that domestic inflationary pressures have eased sufficiently to return inflation to his 2% target.

After the European Central Bank last set its policy rate in mid-March, two U.S. banks failed and Swiss giant Credit Suisse was bought by rival UBS under stress, financial markets were in a state of interbank turmoil. Confused.

At the time, central bank governor Christine Lagarde said policymakers would need to keep raising rates if uncertainty for banks abated and the central bank’s inflation outlook remained the same. Although the third US bank, First Republic, collapsed this week, eurozone banks have weathered the market turmoil, leaving room for the central bank to continue raising rates.

On Thursday, the central bank said a future decision by its 26-member Governing Council “guarantees that the policy rate will be raised to a sufficiently restrictive level” to bring inflation back to its 2% target, and that “the level It will be maintained as long as it continues,” he said. need. “

The bank also said it expected the shrinking of its balance sheet to accelerate as it strengthened its policy stance. Starting in July, it will stop reinvesting earnings from maturity assets purchased under its larger bond buying program, which had around €3.2 trillion ($3.5 trillion) in assets at the end of April. In the past, bonds, mostly government debt, were bought to encourage banks to lend and invest more and generate more economic activity.

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