The European Central Bank raised interest rates by a quarter point to 3.5 percent and has indicated it will raise them again in July, warning that inflation is far from being overcome.
The ECB’s decision on Thursday to raise its benchmark deposit rate to its highest level in 22 years came as it raised its inflation forecast and downgraded its growth forecast for the next three years.
Christine Lagarde, president of the ECB, said after the meeting that rate setters “still have ground to cover” and that they are likely to tighten lending conditions again at the next policy meeting on July 27 unless there is a “material change” in economic data. comes. .
The bank reiterated its warning that it expected inflation to “stay too high for too long” as it will not return to its target of 2 percent from now until 2025.
“This is an aggressive rise,” said Claus Vistesen, an economist with research group Pantheon Macroeconomics, adding that the ECB’s new forecasts were “definitely stagflation.”
The yield on the two-year German government bond rose by 0.13 percentage point to 3.18 percent after the announcement. The euro rose 0.1 percent against the dollar to $1.08.
The central bank’s latest rate hike contrasts sharply with the US Federal Reserve’s decision to suspend interest rate hikes a day early.
The ECB started raising interest rates a few months after the Fed and, at 6.1 percent, inflation is now higher in the eurozone than in the US.
Eurozone inflation has fallen from a record 10.6 percent in October. But that is mainly due to lower energy costs and the ECB is concerned that a prolonged period of high inflation threatens to trigger a spiral of rising wages and costs that will keep price pressures high.
Wages per employee in the eurozone rose 5.2 percent in the first quarter from a year ago, up from 4.8 percent in the fourth quarter, according to ECB data released last week.
The ECB raised its core inflation forecast to 5.1 percent this year, 3 percent next year and 2.3 percent in 2025 – in part because of the strength of the labor market.
Jörg Asmussen, a former ECB executive who now heads the German Insurance Association, said he expected rate-makers to remain in tightening mode for some time to come. “I wouldn’t be surprised if markets have to adjust their interest rate expectations, especially with regard to the timing of the first rate cut.”
Equity markets, already lower on the day, remained negative after the central bank’s move. The French Cac 40 and the German Dax index were down 1 percent and 0.8 percent respectively.
Despite low unemployment, the eurozone economy remains weak and has contracted slightly over the past two quarters, although it has proved more resilient than initially feared following Russia’s full-scale invasion of Ukraine.
The ECB slightly lowered its growth forecasts. It now expects the region’s economy to grow by 0.9 percent this year, 1.5 percent in 2024 and 1.6 percent in 2025.
The central bank confirmed it would stop reinvesting proceeds from its asset purchase program from July – a move that is expected to shrink its balance sheet by €25 billion a month.
Additional reporting by Philip Stafford and George Steer in London