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The European Central Bank (ECB) has raised interest rates by 25 basis points to 3.5% and signaled another hike in July, warning that inflation is far from defeated.
Thursday’s decision to raise its benchmark deposit rate to a 22-year high comes as the ECB grapples with a dilemma between an apparent wage-price spiral in the euro zone and the region’s economic stalled.
ECB President Christine Lagarde said after the rate-setting meeting that rate-setters “still have a way to go” and that unless there was a “substantial change” in economic data, they were likely to leave Borrowing conditions will be tightened again at the next policy meeting on July 27.
The ECB raised its inflation forecast for the next three years while slightly lowering its growth forecast, and again warned that it expects inflation to “remain too high for too long” and not return to its 2% level for the next two years The goal.
The yield on two-year German government bonds rose 0.13 percentage point to 3.18% after the rate hike was announced. The euro was up 0.1% against the dollar at $1.08.
The ECB’s latest rate hike contrasted with the Federal Reserve’s decision to pause rate hikes the previous day.
The ECB started raising rates a few months after the Fed, and inflation in the Eurozone (6.1%) is currently higher than in the US.
Inflation in the euro zone has eased from a record 10.6% in October last year. But that mainly reflects lower energy costs, with the ECB concerned that persistently high inflation could lead to a spiral in wages and costs, keeping price pressures high.
According to data released by the European Central Bank last week, the per capita compensation of employees in the euro area rose by 5.2% in the first quarter from a year earlier, up from 4.8% in the fourth quarter.
The ECB raised its forecast for core inflation to 5.1% this year, 3% next year and 2.3% in 2025 – partly due to a strong labor market.
“This is a hawkish rate hike,” said Claus Vistesen, an economist at research firm Pantheon Macroeconomics. He added that the ECB’s latest forecasts highlighted “clear stagflation”.
Jörg Asmussen, a former ECB executive board member who now heads the German Insurance Association, said he expected rate-setters to remain in tightening mode for some time. “I wouldn’t be surprised if the market had to revise its rate expectations, especially with regard to the timing of the first rate cut.”
Stocks, already lower on the day, remained in negative territory following the European Central Bank’s move to raise interest rates. France’s CAC 40 and Germany’s DAX fell 1% and 0.8%, respectively.
Despite low unemployment, the euro zone economy remains weak, contracting slightly in the past two quarters, although it has proved more resilient than initially feared after Russia’s full-scale invasion of Ukraine.
The ECB slightly lowered its growth forecast. It now expects the region’s economy to grow by 0.9% this year, 1.5% in 2024 and 1.6% in 2025.
The ECB confirmed it would stop reinvesting proceeds from its asset purchase program from July – a move expected to help shrink its balance sheet by 25 billion euros a month.
Additional reporting by Philip Stafford and George Steer in London
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