European Central Bank hikes interest rates for seventh time in a row and Lagarde signals more rises
The European Central Bank (ECB) today hiked interest rates for the seventh time in a row and slowed the pace of its aggressive campaign to tame inflation, though its chief Christine Lagarde signalled more rises are coming.
She and the rest of the governing council sent borrowing costs among the 20 countries using the euro up 25 basis points to 3.25 per cent, their highest level in nearly 15 years.
Today’s move was in line with market expectations. It was slow down from a string of at least 50 basis point increases.
Just a week or so ago, markets reckoned the ECB would send rates up 50 points, but a series of weaker economic data and a drop in headline inflation prompted analysts to bet on a smaller rise today.
Collectively, the ECB has raised rates 375 basis points in under a year, the most aggressive rate hike cycle it has ever embarked on since it was created at the turn of the millennium.
Analysts still think there could be at least one more rise from Lagarde and co in the coming months as they catch up to the Bank of England and Federal Reserve, who have taken borrowing costs to 4.25 per cent and 5.25 (upper bound) respectively.
Developments in the eurozone economy since the ECB’s last meeting “broadly supports the assessment of the medium-term inflation outlook,” the monetary authority said, suggesting it is still focused on tackling price pressures, which it described as “remain[ing] strong”.
Inflation in the eurozone has trimmed from a peak of more than 10 per cent in October to seven per cent, but core inflation still remains stubbornly high, luring the ECB into a seventh straight rise.
Lagarde in the post-announcement press conference struck a hawkish tone, repeating several times that the ECB still has “more ground to cover” and that it is “not pausing” yet.
“it is clear the ECB will continue to hike. Underlying inflationary pressures remain too strong, with the annual rate of April services inflation having continued to accelerate,” analysts at Japanese bank Nomura said, adding they think rates will peak at 3.75 per cent.
Lagarde’s tone contrasted with Powell’s, who told journalists yesterday that the Fed’s decision to omit language in their policy statement that indicated more rate hikes could be on the way was a “meaningful change”.
Markets are pricing in rate rises at each of the ECB’s next two meetings. They think the Bank will raise rates 25 points next Thursday.
In contract, they think there’s an outside chance the Fed will cut rates at its next meeting in June and could lower them 80 points by the end of the year.
The euro slipped against the US dollar, while the pan-European Stoxx 600 fell around half a percentage point.