ECB raises interest rates for the 8th time in a row, to a 22-year high

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High was 0.25 percentage points (pp), to 3.5% per year. Christine Lagarde, President of the European Central Bank, in an archive image Francois Lenoir/Reuters The European Central Bank (ECB) raised borrowing costs to the highest level in 22 years on Thursday (15) and left the door open for more increases, broadening its fight against high inflation even as the euro zone economy weakens. The ECB raised its main interest rate — the rate banks pay to safely leave money at the central bank — for the eighth consecutive time, by 0.25 percentage points (pp), to 3.5%, the highest level since 2001 “Interest rates will be taken to levels restrictive enough to bring inflation back to the 2% target over the medium term, and they will be kept at those levels for as long as necessary,” said ECB President Christine Lagarde in press interview after the decision. The central bank of the 20 countries that share the euro also said it projects inflation will be above its 2% target by 2025 and hinted at further hikes in coming months. The ECB raised its core inflation projections, which exclude volatile energy and food numbers, which the bank is closely watching, for 2023 and 2024. Lagarde said wage increases and price hikes by companies to improve their profits were becoming a major driver of inflation. “Inflation has been coming down, but it’s projected too high for too long,” she said. On Wednesday, the Federal Reserve halted a series of 10 successive rate hikes — a powerful signal to investors around the world that the current cycle of tightening in developed economies is coming to an end, even if a few more rate hikes in the USA are still possible. Inflation in the euro zone has been moderating for months, thanks to lower energy prices and a sharp hike in interest rates by the ECB. But at 6.1% it is still unacceptably high for the central bank and the rise in underlying prices is just starting to slow. For its part, growth in the eurozone is, at best, stagnating. The upward revisions to inflation estimates for this year, next year and 2025 — when it should still be above the central bank’s target of 2.2% — surprised economists. Yields on eurozone government bonds and the euro rose as traders bet on higher interest rates. “Barring a material change in our baseline scenario, it is very likely that we will continue to raise rates in July,” Lagarde said. “We are not thinking about a break, as you can see.”

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