The European Central Bank raised interest rates by half a percentage point on Thursday, moderating its pace from recent meetings, but warned that rates would still need to rise “significantly” next year, as the bank said that inflation would be more stubborn than initially expected.
Policymakers are trying to gauge the right amount of easing needed to bring down record inflation even as the region’s economy slows.
The annual rate of inflation in the euro zone slowed last month to 10 percent, the first slowdown in more than a year. While it’s an encouraging sign for central banks, especially as it was accompanied by lower inflation rates in the US and Britain, policymakers are in no rush to end their battle against high inflation ECB staff said inflation will average higher than previously expected this year and next and will still be above the bank’s 2 percent target in 2025.
“The Governing Council considers that interest rates will still have to rise significantly at a constant rate to reach sufficiently restrictive levels. To ensure a timely return of inflation to the medium-term target of 2 percent,” the bank said in a statement on Thursday.
The decision follows a similar move by the Federal Reserve, which raised rates by half a point on Wednesday, and the Bank of England, which did the same on Thursday. All three central banks reduced the size of their rate hikes from three-quarters of a percentage point at previous meetings.
In the 19 countries that use the euro, prices rise at very different speeds. The annual inflation rate slowed last month to 6.6% in Spain, but in Estonia, Latvia and Lithuania, the rate remained above 21%.
And although price increases are beginning to slow, the outlook for inflation is uncertain and, in Europe, heavily influenced by the volatility of energy prices. Policymakers are alert to signs that this period of high inflation is feeding into the economy, particularly through higher wage demands. They are also wary of expensive and untargeted government policies to insulate households from high energy prices, because this risks increasing economic demand and causing inflation to persist.
“Keeping interest rates at restrictive levels over time will reduce inflation by dampening demand and also avoid the risk of a persistent upward shift in inflation expectations,” the bank said on Thursday.
From the July meeting to the October meeting, the ECB already raised interest rates by 2 percentage points, the fastest pace of tightening in the central bank’s two-decade history.
On Thursday, the central bank went further and raised its deposit rate, which is what banks get for depositing money with the central bank overnight, from 1.5% to 2%, the most high since January 2009.
Christine Lagarde, the president of the central bank, had previously warned that a slowdown in economic growth, including a shallow recession, would not be enough to significantly curb inflation on its own and that central bank action would still be needed.