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The European Central Bank takes rates to a record high and signals the end of hikes

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The European Central Bank raised interest rates by a quarter of a percentage point to 4% Thursday and hinted it was done with its protracted campaign of rate hikes to tame stubborn inflation.

The central bank has now raised its main interest rate at 10 consecutive meetings, taking it to the highest level since the launch of the euro currency in 1999. The next step is to keep borrowing costs at that level, the ECB suggested.

Based on its current assessment, key interest rates “have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” the bank said in a statement.

Annual inflation in the 20 countries that use the euro had been slowing until last month, when it remained stuck at 5.3%, well above the ECB’s 2% target, as energy costs rose. There are signs, however, that successive rate increases are constraining economic activity.

Speaking to journalists, ECB President Christine Lagarde defended Thursday’s decision, saying: “I think it will reinforce progress towards the target, we’re determined to get there, to that 2%.”

The central bank expects inflation to “still remain too high and for too long,” she said. “But inflation has declined and we want it to continue to decline and to reinforce that process,” she added.

Is this the peak?

Economists agreed that the ECB’s focus now seemed to be on keeping borrowing costs high, rather than raising them again.

“This looks like the peak,” Morgan Stanley analysts wrote in a note Thursday.

Similarly, Holger Schmieding, chief economist at Berenberg, said: “Of course, the ECB kept its options open… Still, by central bank standards, the signal that the ECB does not expect to raise rates further is fairly clear.”

The euro area economy eked out minimal growth in the April-June period, expanding by 0.1% compared with the first quarter.

Germany fared worse: Its output was flat in the second quarter, suggesting that Europe’s largest economy is struggling to bounce back from a winter recession, when its gross domestic product shrank over two consecutive quarters.

The latest data is not encouraging either. Industrial production fell 1.1% both in the euro area and the broader European Union in July compared with June, Europe’s statistics office said Wednesday.

High inflation and the interest rate hikes needed to curb it are also likely to weigh on growth in coming months, according to the European Commission. On Monday, the EU’s executive arm downgraded its economic forecasts for this year and next, citing those two factors. It now expects the EU economy to grow 0.8% in 2023.

SOURCE: CNN