ECB hikes rates, promises another 50 bps more in March
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FRANKFURT (Reuters) – The European Central Bank on Thursday hiked interest rates for a fifth straight month, announcing another half a percentage point hike for March to spur monetary tightening even as some global peers slow.
Fighting runaway inflation, the ECB has raised interest rates by an unprecedented 3 percentage points in just seven months on hopes that higher borrowing costs will dampen demand and prevent rapid price growth from taking hold.
At its first meeting of the year, the ECB raised the deposit rate from 2% to 2.5%, as promised in December. But it did not follow the Federal Reserve in clearly signaling a slowdown in the pace of monetary tightening.
“The Governing Council will stay the course and hike rates significantly at a steady pace,” the ECB said in a statement.
“The Governing Council intends to raise interest rates by a further 50 basis points at its next monetary policy meeting in March, and will then assess the future stance of its monetary policy,” he added.
Policymakers have been increasingly divided on the outlook for interest rates in recent weeks as incoming data has been mixed and could point to both faster and slower rate hikes.
Underlying inflation, an important measure of the durability of price growth, has remained at multi-decade highs, and wage growth, another important component of long-term inflation, is clearly accelerating. The labor market is also tight, and the unemployment rate is at an all-time low.
Meanwhile, Wednesday’s signal of a slowdown from the Fed, which started raising rates earlier, suggests the ECB’s window may close sooner than expected.
Markets have accepted this dovish argument so far, especially as Conservative politicians’ votes have been in the clear majority for much of the past year.
Markets were still pricing in another full percentage point rate hike after Thursday’s move, which would take the deposit rate to its highest level in over two decades.
But political doves say headline inflation is already 2 percentage points below the peak, while a rapid fall in natural gas prices points to a further decline in inflation.
The eurozone economy is teetering on the brink of a recession that is inherently deflationary, and credit growth is facing its biggest drop since the bloc’s debt crisis in 2011, suggesting rate hikes are slowly making their way through the economy.
(Reporting by Balazs Koranyi; Editing by Catherine Evans)