ECB hikes rate to 22-year high as inflation still 'too high'

AFP , Thursday 15 Jun 2023

The European Central Bank on Thursday said eurozone inflation was still too elevated as it hiked interest rates for an eighth consecutive time to a two-decade high, despite a darkening economic outlook.

The European Central Bank, ECB is pictured prior to the press conference following the meeting of the governing council of the ECB in Frankfurt/Main, Germany, on June 15, 2023. AFP


The ECB increased rates by another 25 basis points, taking the closely-watched deposit rate to 3.50 percent -- its highest level since 2001.

"Inflation has been coming down but is projected to remain too high for too long," the ECB said in a statement.

Policymakers were "determined to ensure" a return to the bank's two-percent target, and will keep rates at sufficiently restrictive levels "for as long as necessary", it added.

The quarter-point hike was widely pencilled in by analysts.

They were instead hoping president Christine Lagarde would use her 1245 GMT Frankfurt press conference to shed light on whether the ECB's unprecedented campaign of monetary policy tightening was nearing the summit.

In the United States, the Federal Reserve on Wednesday held off from raising interest rates again after 10 straight increases.

But the Fed indicated more hikes were likely before the end of the year as inflation remains double the bank's target rate.

In the euro region, the ECB has hiked borrowing costs at the fastest rate ever to tame inflation after Russia's war in Ukraine sent food and energy prices soaring, raising rates by 3.75 percentage points since last July.

Eurozone inflation slowed to 6.1 percent in May year-on-year, down from a peak of 10.6 percent in October, mainly thanks to rapidly falling energy costs.

The ECB said its inflation-fighting efforts were "gradually having an impact across the economy", with loan demand slowing sharply in the eurozone as higher borrowing costs take their toll on households and firms.

But inflation remains three times above target and core inflation -- which strips out volatile food and energy prices -- eased only slightly to 5.3 percent, after 5.6 percent in April.

Lagarde said earlier this month there was "no clear evidence" yet that core inflation had peaked.

The ECB reiterated on Thursday that it will "follow a data-dependent approach" as it charts the way forward.

'Last optimists'

Like all central banks, the ECB has to walk a fine line in raising interest rates sufficiently to dampen demand and contain inflation, without provoking a sharp economic slowdown in the process.

But the eurozone economy has proved less resilient than initially thought.

Revised data last week showed that the economy in the 20-nation currency union shrank by 0.1 percent for two straight quarters at the end of 2022 and the start of 2023, meeting the technical definition of a recession.

While still mild, the surprise winter slump has cast doubt on more optimistic economic forecasts for 2023.

In updated forecasts on Thursday, the ECB said it now saw the eurozone economy growing by 0.9 percent in 2023, down from 1.0 percent previously.

The ECB also slightly raised its inflation outlook, predicting it will reach 5.4 percent in 2023, 3.0 percent in 2024 and 2.2 percent in 2025 -- a 0.1 percentage point increase from the March predictions for each year.

"It looks as if the ECB remains one of the last growth optimists standing, expecting eurozone growth to return to potential before year-end," said ING bank economist Carsten Brzeski.

"This keeps the door for further rate hikes wide open."

While the recent weak economic data and gradually slowing inflation may boost the case of the "doves" among ECB policymakers against further tightening, most observers expect at least one more rate hike to follow.

ECB "hawks" may point to strong wage growth in the eurozone and persistently high core inflation to warn against taking the foot off the gas too early, analysts said.

Policymakers including Lagarde have also expressed concern about corporate profits worsening inflation, suggesting some companies were raising prices even as their costs have come down -- a practice sometimes dubbed "greedflation".

Berenberg economist Holger Schmieding predicted "a heated summer debate" between the hawks and the doves, but said "a final rate hike" of another 25 basis points at the next meeting in July seemed likely.

The ECB on Thursday also gave an update on efforts to shrink its massive balance sheet, built up over years of hoovering up government and corporate debt.

The bank confirmed that it will from July stop reinvesting the proceeds from maturing bonds issued under a pre-pandemic stimulus scheme.

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