Cyprus Mail

ECB hikes rates, promises another 50 bps more in March

file photo: european flags are seen in front of the ecb building, in frankfurt
The ECB building, in Frankfurt, Germany

The European Central Bank raised interest rates for the fifth successive time on Thursday and signalled another half a percentage point increase for March, pressing ahead with policy tightening even as some global peers are slowing down.

Fighting runaway inflation, the ECB has raised its key rate by an unprecedented 3 percentage points in just seven months, in the hope that higher borrowing costs will temper demand and prevent rapid price growth from getting entrenched.

At its first meeting this year, the ECB lifted the deposit rate to 2.5 per cent from 2 per cent, as it had promised in December. But it did not follow the US Federal Reserve in clearly signalling a slowdown in the pace of policy tightening.

“The Governing Council will stay the course in raising interest rates significantly at a steady pace,” the ECB said in a statement.

“The Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy,” it added.

Policymakers have been increasingly split over the rate outlook in recent weeks as incoming data was ambiguous and could support the case for both quicker and slower rate hikes.

Underlying inflation, a key measure of the durability of price growth, remains stuck at multi-decade highs and wage growth, another key component of long-term inflation, is clearly accelerating. The labour market is also tight, with the jobless rate at an all-time low.

Wednesday’s signal of a slowdown by the Fed, which started to raise rates earlier, meanwhile suggests that the ECB’s window of opportunity may start to close sooner than expected.

Markets have accepted this hawkish argument so far, especially as conservative policymakers’ voices have been in a clear majority for much of the past year.

Markets were still pricing in another full percentage point rate hike after Thursday’s move, which would put the deposit rate at its highest in over two decades.

But policy doves say that headline inflation is already 2 percentage points below the peak, while a rapid decline in natural gas prices points to a further drop in inflation.

The euro zone economy is on the verge of a recession, which is naturally deflationary, and credit growth is set for its biggest drop since the bloc’s 2011 debt crisis, suggesting that rate hikes are slowly working their way through the economy.

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