European Central Bank outpaces US Fed with half-point hike
FRANKFURT, Germany (AP) – The European Central Bank rushed ahead with another outsized rate hike on Thursday and predicted more, underscoring its commitment to curb inflation even as the European economy slows and the US Federal Reserve maintains its pace of hikes reduced.
Frankfurter Bank raised its key benchmarks by half a percentage point and said it would take a similar step in March. Policymakers are aggressively trying to contain price spikes that have slowed from record highs but are still hurting households in the 20 countries that use the euro currency.
The bank, which also raised half a point in December, “will stay the course and raise rates significantly at a steady pace,” ECB President Christine Lagarde said at a news conference.
“Now you’re going to say, ‘Well, yeah, but what about after March? Does that mean you’ve reached the top or the top?’ She added. “No no no no. We know we have work to do. We know we’re not done yet.”
The Bank of England also rose sharply on Thursday with a half-point hike, but the Fed retreated a day earlier, slowing to a quarter-point hike.
Central bank actions can slow economic growth if they go too far. Given the ECB’s swift action, Lagarde acknowledged that “economic activity has slowed significantly since the middle of last year” and is expected to remain weak as global demand slows and Russia’s war in Ukraine stokes uncertainty.
The eurozone economy is already stagnating – it grew just 0.1% over the last three months of 2022.
But Lagarde was optimistic overall, noting that supply chain backups will be eased and Europe’s natural gas supplies will become more secure even after Russia has halted most supplies to the continent.
“The economy has proved more resilient than expected and should recover in the coming quarters,” she said.
The ECB’s larger moves relative to the Fed reflect in part a later start of rate hikes in July, four months after the US Federal Reserve made its first rate hike and from lower levels. That means more catching up to do.
Rising interest rates make it more expensive for consumers to borrow for purchases like homes and cars, and for businesses to finance expansions. This is intended to cool demand for goods that are pushing up consumer prices, which rose 8.5% yoy in the last month in the euro zone.
The annual rate, while still high, has fallen for three straight months after hitting a record high of 10.6% in October.
Inflation is one of the key factors holding back economic growth and sapping consumers’ purchasing power as higher food and energy prices eat away at their paychecks.
High energy prices linked to Russia’s war in Ukraine have soared utility bills for homes and businesses, which have passed these additional costs on to shoppers and guests. This was the main driver of European inflation, which is well above the ECB’s target of 2%, which is seen as best for the economy.
Workers across continental Europe and the UK have held strikes and protests to demand their wages keep pace with the rising cost of living.
While rate hikes are the usual cure for inflation, they also mean people face sharply higher mortgage rates to buy homes and banks becoming tighter on credit.
ECB officials say decisive action now will prevent inflation from feeding into wages, prices and people’s expectations, and force more drastic action later. Bank officials say economic growth should recover more strongly later in the year and expect output to rise 0.5% — still down from 3.5% in 2022.
The ECB’s benchmark for lending is now 3% and the rate on deposits left overnight by commercial banks is 2.5%. The Federal Reserve’s interest rate is between 4.5% and 4.75% after Wednesday’s meeting.
David Mchugh, The Associated Press