The European Central Bank (ECB) on June 15 lifted interest rates by another quarter-point - to their highest level in 22 years and left the possibility for more hikes, extending its fight against high inflation amid faltering euro zone economy.
The ECB increased its key interest rate - the one banks pay to park cash securely at the central bank - for the eighth consecutive time, by 25 basis points to 3.5 per cent, its highest level since 2001. This comes less than a day after the US Federal Reserve left borrowing costs unchanged following 10 straight increases since 2001 to assess the economic impact of the rate hikes.
“Future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the two per cent medium-term target and will be kept at those levels for as long as necessary,” the Governing Council said Thursday in a statement.
The ECB decisions were underpinned by fresh quarterly projections suggesting inflation will moderate more slowly than previously envisaged, to 2.2 per cent in 2025, which is still above-target but down from current levels of about three times the goal.
Inflation in the euro zone is still unacceptably high for the ECB at 6.1 per cent and underlying price growth, which typically excludes food and energy, is only starting to slow. "Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation," the ECB said.
The decision was set to keep the ECB on the tightening path, particularly after it failed to predict the current bout of high inflation and began raising rates later than many global peers last year. Economists polled by news agency Reuters before Thursday's decision expected another 25-basis-point deposit rate hike in July, as flagged by a host of policymakers.
While moves beyond July are less certain, ECB President Christine Lagarde is expected to keep a further hike in September in play and to push back against investor bets that the central bank will cut rates early next year.
The Euro Area Business Cycle Dating Committee, which uses employment as well as economic growth data in determining when a recession has occurred, found no recession at its last assessment March 27 and will revisit the question in November, according to Associated Press.
Consumer prices started rising as the global economy bounced back from the COVID-19 pandemic and created supply chain bottlenecks. Oil and natural gas prices also spiked after Russia invaded Ukraine. The war also sent food and fertilizer prices soaring amid disruption to supplies from the warring countries, both major agricultural exporters.
The pressures are starting to ease, but the initial burst of inflation is being reflected in higher wage demands and prices for services, even as energy prices have fallen in Europe in recent months. Home prices in Europe started to fall in the last months of 2022, the first dip since 2015 - one sign that the ECB’s policies are feeding through to the economy, added Associated Press.
World stocks slipped from 18-month peaks and the dollar pushed higher on Thursday as traders watched the ECB push through an eighth straight interest rate hike. Both US and German 2-year bond yields edged higher, which drive global borrowing costs, to their highest levels since March, leaving them at 4.8 per cent and almost 3.2 per cent respectively.
Paris and Frankfurt blue-chips were down by around as much as 0.7 per cent, while a lifeless euro and overnight tumble from the yen helped the dollar clamber off a four-week low against the other major world currencies.
MSCI's broadest index of Asia-Pacific shares outside Japan ended up around 0.7 per cent at a two-month high, while Japan's tearaway Nikkei held at a three-decade peak. S&P 500 futures were flat and MSCI's 47-country global index was fractionally lower following five straight days of gains.
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