European Central Bank hikes interest rates by quarter point with inflation “too high for too long”
It now expects inflation to be even higher than previously thought.
he European Central Bank hiked interest rates by another quarter of a percentage point as it now expects inflation to be even higher than previously thought.
The Bank said: “Inflation has been coming down but is projected to remain too high for too long.
“The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It therefore today decided to raise the three key ECB interest rates by 25 basis points.”
Rates have now risen by four percentage points since the summer of 2022, after a long period in the negatives.
Inflation in the Eurozone in May was 6.1%, after a sharp fall from 7.0% in April. But that is still significantly higher than the 2% target.
The hike is unlikely to be the last, with interest rate swap markets pricing in another rate rise before the end of the year, with a second considered a strong possibility.
The central bank also increased its inflation forecasts. It now expects privces to rise by 5.4% this year, 3.0% next year and 2.2% in 2024. All of those figures are up by 0.1 percentage points from its past predictions.
The ECB decision comes hot on the heels of the meeting of the Federal Reserve when US interest rates were left unchanged to allow it to assess the impact of the 10 hikes it has pushed through so far in the current cycle of monetary tightening.
The Fed decision, though, was described as a “hawkish pause”, as chair Jerome Powell signalled that two more rate rises were still on the horizon.
All eyes will now turn to the Bank of England, which is due to make its decision on the level of rates on Thursday. A 13th consecutive rise is expected lifting the cost of borrowing from 4.5% to 4.75%, the highest since October 2008. However, some City commentators now believe that the Bank’s Monetary Policy Committee will order a bigger half point rise to send a signal about the seriousness of its commitment to bring inflation down.
The scale of the hike will be heavily influenced by inflation figures for May being published the previous day. The Consumer Prices index stood at 8.7% in April, down from 10.1% in March, and is expected to fall further. But the Bank s likely to pay closer attention to the core CPI reading, which is seen as a more stable measure of prices, and hit a 30-year high last month.