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The European Central Bank has raised interest rates to an all-time high in a bid to cool consumer prices, but the euro fell after the central bank signalled its cycle of increases was near its end.
The ECB’s knife-edge decision to lift its deposit rate for the 10th consecutive time, by 25 basis points to 4 per cent, came as officials cut their growth forecasts for the eurozone economy.
The euro fell to a three month low against the dollar after Thursday’s decision by the ECB’s governing council in Frankfurt. In mid afternoon trading the currency was down 0.5 per cent on the day at $1.0677.
Yields on interest rate sensitive two-year German Bunds, viewed as a benchmark for the eurozone, fell 0.04 percentage points to 3.13 per cent.
Many economists predict major central banks are nearing the end of their rate rises since inflation is falling and growth is slowing under pressure from higher borrowing costs.
The ECB hinted that borrowing costs in the eurozone had peaked. It said that Thursday’s increase meant “interest rates have reached levels that, maintained for a sufficiently long duration will make a substantial contribution to the timely return of inflation at the [ECB’s 2 per cent] target.”
The move takes the ECB deposit rate above the previous record high in 2001, when rate-setters raised borrowing costs to boost the value of the newly launched euro.
Tomasz Wieladek, chief European economist at T Rowe Price said: “This is a very dovish hike . . . They have clearly signalled their intention to keep rates on hold from here.”
At a Frankfurt press conference, Christine Lagarde, ECB president, read out the formal statement on the “substantial” impact of current interest rates. But, in a caveat to such dovish language, she added that rate-setters “are not saying we are now at peak”.
The ECB chief said a “solid majority” of rate-setters favoured Thursday’s increase, over a minority that backed a pause.
Thursday’s decision was the ECB’s most consequential for more than a year, with more dovish governing council members arguing for a pause because of signs of weaker growth, slowing bank lending, a cooling labour market and falling inflation. But hawks worried inflation was still too high.
The ECB lifted its forecast for inflation this year from 5.4 per cent to 5.6 per cent and for next year from 3 per cent to 3.2 per cent. But it trimmed its 2025 inflation forecast from 2.2 per cent to 2.1 per cent.
While eurozone inflation has dropped from a peak of 10.6 per cent last year to 5.3 per cent in August, the recent rebound in oil prices has raised concerns that the disinflation process will be bumpy.
The deteriorating outlook for the eurozone economy was reflected in the ECB’s cut to its growth forecast for this year from 0.9 per cent to 0.7 per cent and for next year from 1.5 per cent to 1 per cent.
Eric Dor, an economics professor at the IESEG School of Management in Paris, said Europe looked set for a period of sticky inflation and stagnant growth. “Stagflation is now very plausible in the eurozone,” he wrote on social media site X, formerly called Twitter.
Lagarde said: “We are doing that not because we want to force a recession but because we want price stability to be there for people.”
The US Federal Reserve and Bank of England will meet next week.