ECB raises interest rates to all-time high

Decision came as officials cut growth forecasts for the eurozone economy

The uuro currency sign outside the former European Central Bank building in Frankfurt. AFP
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The European Central Bank raised interest rates to an all-time high on Thursday in a bid to limit rises in consumer prices.

The ECB decision to increase rates by 25 basis points to 4 per cent came as officials cut growth forecasts for the eurozone economy.

The 10th straight interest rate increase took the deposit rate to its highest level since the introduction of the euro in 1999.

Experts had thought this will be the peak in the monetary tightening cycle.

But Christine Lagarde, ECB's President, said on Thursday that was too early to say.

ECB officials have lately embraced a message of prolonged constriction, playing down the prospect that rates will be lowered any time soon.

The governing council in Frankfurt said on Thursday that rates have now reached a level that will make a “substantial contribution” to bringing inflation under control and said it will keep borrowing costs at “sufficiently restrictive levels for as long as necessary”.

When policymakers last raised borrowing costs in July, they deliberately left the path ahead open to assess a raft of new economic data over the summer.

The picture since then of slowing growth under stubborn price pressures appeared to point to the possibility of stagflation materialising, reminiscent of the curse it inflicted on advanced economies during the 1970s.

Core inflation, which strips out volatile items such as energy and food, has barely budged in recent months and was at 5.3 per cent in August.

Eurozone growth for the second quarter was revised lower and business surveys signalled worsening prospects for the 20-nation bloc.

New forecasts by the ECB had been billed as a key source of input for the decision.

While showing softer economic growth for 2023 through 2025, they also revealed inflation remaining above the 2 per cent target in 2025.

"Inflation continues to decline but is still expected to remain too high for too long," the ECB said in a statement, announcing its rate decision.

"The governing council is determined to ensure that inflation returns to its 2 per cent medium-term target in a timely manner."

Highlighting the continued difficulties in bringing consumer prices under control, the ECB raised its forecast for inflation this year and next.

They lowered it slightly for 2025 to 2.1 per cent, close to the ECB target.

But it also slashed its forecasts for eurozone growth over the next three years, pointing to the impact of "tightening on domestic demand and the weakening international trade environment".

Spanish Economy Minister Nadia Calvino on Thursday said she hoped the rate increased announced by the ECB would be the last one and that she was eager to hear the bank's explanations for the decision.

"We hope that it will be clear [from their explanations] that this hike puts an end to the rapid increase in interest rates that we have seen over the last year," Ms Calvino said.

The decision is the first of several expected from developed economies over the coming days.

The US Federal Reserve is meeting next Wednesday as policymakers there become more optimistic they can tackle inflation without causing much economic damage.

The Bank of England, the Swiss National Bank and central banks in Sweden and Norway will set policy a day later.

Updated: September 15, 2023, 7:53 AM