The European Central Bank raised interest rates for the 10th meeting on Thursday but signaled that it is likely done tightening policy. Annual inflation in the 20 countries that use the euro remains well above the ECB’s target, depriving consumers of purchasing power and contributing to economic stagnation. “The Governing Council remains determined to ensure that inflation returns to its 2% target promptly,” the central bank said. It raised its deposit rate to 4% from 3.75%, taking it to an all-time high. It also increased the rates on its marginal lending and deposit facilities and capped the size of its asset purchase program.
Markets and many economists expected the move. Incoming data and surveys have signaled a sharp slowdown in growth, and the ECB needs to catch up in its effort to reduce inflation. It is also unlikely to catch up with global central banks, including the U.S. Federal Reserve, which has been raising rates much faster than the ECB.
ECB President Christine Lagarde avoided indicating whether this would be the policymaker’s last hike, noting that the decision rested on incoming data. She warned that the ECB will continue to monitor developments and stand ready to act if necessary.
Markets and many economists had expected a 25 basis point rate rise, the third in four months. But the ECB is likely to pause for a while, particularly given weaker-than-expected economic data, including an industry report on Thursday showing new orders in the contracting services sector. New orders in manufacturing are already falling, and overall business sentiment has deteriorated markedly since the start of the year.
In addition, the ECB’s new projections show core inflation not returning to its target until late 2025 and have cut growth forecasts. Those factors may make persuading hawkish ECB members to rethink the pause idea challenging.
ING economist Carsten Brzeski, among those calling for the ECB to stop hiking, says a rate rise will help dampen the economy’s downward momentum and give the ECB a chance to catch up with its peers. “But the ECB’s communication was clear: today was the end of the current cycle,” he wrote in a note to clients. The ECB’s next policy meeting will be on September 12. ING is expecting a lengthy pause. It is also anticipating rate cuts in the second half of next year.