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ECB hikes rates to record level

2023-09-14 HKT 23:26
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  • ECB chief Christine Lagarde said she couldn't completely rule out raising rates further. Photo: AP
    ECB chief Christine Lagarde said she couldn't completely rule out raising rates further. Photo: AP
The European Central Bank raised its key interest rate to a record high of 4 percent on Thursday but, with the euro zone economy in the doldrums, signalled that the hike, its 10th in a 14-month-long fight against inflation, was likely to be its last.

The central bank for the 20 countries that share the euro also raised its forecasts for inflation, which it now expects to come down more slowly towards its 2 percent target over the next two years, while cutting those for economic growth.

That illustrated the dilemma ECB policymakers had faced: prices are still rising at more than twice the target rate but with high borrowing costs, overall economic activity is struggling.

Against this backdrop, the ECB sent a message that its rate hikes were probably at a end, prompting euro zone bond yields and the euro to fall and European shares to rise as investors bet that it would start cutting rates next year.

"Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target," the ECB said.

That is now expected to happen more slowly than at the time of the ECB's previous projections in June, with inflation seen at 5.6 percent in 2023, 3.2 percent in 2024 and 2.1 percent in 2025.

Thursday's 25-basis-point increase pushes the rate the ECB pays on bank deposits to 4.0 percent, the highest level since the euro currency was launched in 1999.

When the ECB began tightening policy in July 2022, that rate was languishing at a record low of minus 0.5 percent, meaning banks had to pay to park their cash securely at the central bank.

ECB President Christine Lagarde did not absolutely rule out a further hike if needed and said interest rates would have to remain at restrictive levels for some time.

"The focus is going to move, going forwards, to the duration, but that is not to say – because we can't say that now – that we are at peak," she told a press conference. (Reuters)

ECB hikes rates to record level