FRANKFURT (Reuters) – The European Central Bank raised rates of interest for the fifth successive time on Thursday and signalled one other half a percentage point increase for March, pressing ahead with policy tightening whilst some global peers are slowing down.
Fighting runaway inflation, the ECB has raised its key rate by an unprecedented 3 percentage points in only seven months, within the hope that higher borrowing costs will temper demand and stop rapid price growth from getting entrenched.
At its first meeting this 12 months, the ECB lifted the deposit rate to 2.5% from 2%, because it had promised in December. But it surely didn’t follow the U.S. Federal Reserve in clearly signalling a slowdown within the pace of policy tightening.
“The Governing Council will stay the course in raising rates of interest significantly at a gentle pace,” the ECB said in an announcement.
“The Governing Council intends to boost rates of interest by one other 50 basis points at its next monetary policy meeting in March and it would then evaluate the following path of its monetary policy,” it added.
Policymakers have been increasingly split over the speed outlook in recent weeks as incoming data was ambiguous and will support the case for each quicker and slower rate hikes.
Underlying inflation, a key measure of the sturdiness of price growth, stays stuck at multi-decade highs and wage growth, one other key component of long-term inflation, is clearly accelerating. The labour market can also be tight, with the jobless rate at an all-time low.
Wednesday’s signal of a slowdown by the Fed, which began to boost rates earlier, meanwhile suggests that the ECB’s window of opportunity may begin to close earlier than expected.
Markets have accepted this hawkish argument thus far, especially as conservative policymakers’ voices have been in a transparent majority for much of the past 12 months.
Markets were still pricing in one other full percentage point rate hike after Thursday’s move, which might put the deposit rate at its highest in over 20 years.
But policy doves say that headline inflation is already 2 percentage points below the height, while a rapid decline in natural gas prices points to an extra drop in inflation.
The euro zone economy is on the verge of a recession, which is of course deflationary, and credit growth is about for its biggest drop because the bloc’s 2011 debt crisis, suggesting that rate hikes are slowly working their way through the economy.
(Reporting by Balazs Koranyi; Editing by Catherine Evans)
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