ECB slows pace of rate hikes, but vows future hikes

frankfurt, Germany–

The European Central Bank slowed its record pace of rate hikes only slightly on Thursday, joining the Federal Reserve and other central banks around the world in tightening their crackdown on inflation while making initial progress against high prices plaguing consumers.

The European Central Bank, the Bank of England and the Swiss National Bank slashed rates back to half a basis point from three quarters on Thursday, as did the Federal Reserve in a flash move this week.

The global movement against soaring consumer prices has slowed as inflation has edged down from painfully high levels. But officials stressed that inflation has yet to retreat from decade highs and that more rate hikes are on the way to stem soaring prices for energy, food and housing that are destroying people’s finances.

World Bank President Christine Lagarde told a news conference: “We have made progress in the past few months, but we have more work to do, we have a longer way to go, and we have to fight A protracted battle.”

That means the bank expects to raise rates by half a basis point “for some time,” she said. “We judge that interest rates will still have to rise sharply and at a steady pace to be sufficiently tight to ensure that inflation returns to our 2% medium-term target in time.”

Federal Reserve Chairman Jerome Powell similarly warned that there is “a long way to go” to get U.S. inflation under control. The comments hit stocks as investors hoped for a reprieve from a sharp rise in borrowing costs, but they got a message from the central bank on Wednesday and Thursday: Not today.

Inflation in the 19 countries that use the euro fell to 10% in November from 10.6% in October, the first decline since June 2021. ECB officials said it was too early to say the pace of inflation had peaked, with high energy prices threatening recession in Europe.

The ECB’s rate hike follows record three-quarter-point increases in July and October. The 0.5 basis point hike was still higher than usual gains ahead of the recent inflation flare-up triggered by a rebound in the pandemic and Russia’s war in Ukraine pushing up food and energy prices.

One reason the ECB is sticking to its hawkish disinflation message: The growth outlook for the European economy has improved from what was previously viewed as a likely disaster.

The bank said the euro zone could face a “short and shallow” recession, with economic output shrinking towards the end of this year and the first three months of 2023. Two consecutive quarters of contraction are one of the definitions of a recession, although economists at the Eurozone Business Cycle Dating Committee use broader data such as the unemployment rate and the depth of the recession.

Despite a spike in energy prices after Russia cut off most gas shipments, the European Union has managed to massively fill underground storage for the winter heating season. That eased concerns about running out of natural gas used for heating, industry and power generation, and reduced concerns about rolling blackouts and industrial shutdowns.

Raising interest rates is the central bank’s main tool to fight inflation. For consumers looking for mortgages and businesses needing credit to operate or invest in new facilities, higher benchmarks are quickly reflected in higher market borrowing costs. More expensive credit reduces the demand for goods and, in theory, reduces price increases as well.

On the downside, higher interest rates would slow economic growth, which has become a concern in the U.S. and Europe. A slight improvement in the euro zone growth outlook, or at least a less catastrophic one, was seen as a green light for Lagarde and the ECB to continue to focus on inflation.

Bank officials say taking tough action now can prevent inflation from becoming chronic and requiring more painful drug treatments.

The European Central Bank’s benchmark bank lending rate is 2%, and the overnight deposit rate of commercial banks is 1.5%.

Between the July and October meetings, the bank raised both benchmarks by 2 percentage points in just three months, the fastest pace since the creation of the common euro currency in 1999 and covering earlier The interest rate hike cycle is 18 months.

Source link

Leave a Comment