The European Central Bank kept up its aggressive efforts to fight inflation on Thursday, raising rates by half a percentage point to the highest since 2008 and all but promising another half-point increase in March.
Even though the eurozone’s overall inflation rate appears to have peaked, Christine Lagarde, the president of the bank, spoke firmly about the E.C.B.’s commitment to stamping out persistent inflationary pressures.
“We know that we have ground to cover,” she said. “We know that we are not done.”
After an initial slow start responding to a steady climb in inflation last year, the central bank began raising interest rates in July. Since then, it has undertaken the fastest pace of monetary tightening in its two-decade history.
But after the move on Thursday, investors are betting that an end is in sight. European bonds rallied, with their yields falling sharply, as analysts forecast that the European Central Bank would raise interest rates only a few more times.
Traders had similar reactions following rate increases by the U.S. Federal Reserve on Wednesday and the Bank of England earlier on Thursday, even though the E.C.B. has not raised rates as much as those two banks.
“The situation is very different from one country to the other, but there are common trends here, which is basically that we are closer to the peak for interest rates,” said Frederik Ducrozet, the head of macroeconomic research at Pictet Wealth Management.
The central bank raised its deposit rate to 2.5 percent on Thursday, and markets are betting the peak will be around 3.3 percent. The yield on 10-year Italian bonds fell 0.4 percentage points to 3.89 percent, the steepest drop in yields since March 2020, and the yield on 10-year German bonds fell about 0.2 percentage points to 2.07 percent.
Recent data suggested inflation peaked in the eurozone in October, at 10.6 percent, but policymakers on Thursday insisted that the battle against high inflation in the region still has not been won. On Wednesday, data showed that the annual rate of inflation in the eurozone fell to 8.5 percent in January, from 9.2 percent the previous month.
In several European countries, including France and Spain, the rate of inflation rose in January. Core inflation, a measure closely watched by policymakers because it indicates how deeply rising prices are embedded in the economy, remains stubbornly high. In January, the annual rate of core inflation, which excludes food and energy prices, was 5.2 percent, holding steady at a record high.
The E.C.B. said in a statement that it would “stay the course in raising interest rates significantly at a steady pace.”
“Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations,” the statement said.
Europeans face tight financial conditions, but the region has been surprisingly resilient to recent economic turmoil even as the war in Ukraine continues into a second year. Data published on Tuesday showed that the countries that use the euro had forestalled a recession late last year, and other economic indicators suggest the outlook is brighter than expected just a few months ago, in large part because natural gas prices have come down from their peak in August.
Still, significant risks remain, particularly from persistent inflationary pressures. A recession may be avoided this year, but the eurozone is likely to experience a sharp economic slowdown as the effects of higher interest rates constrain the economy and inflation eats away at household budgets.
The E.C.B.’s action came nearly an hour after the Bank of England raised its benchmark rate half a point, to 4 percent — its highest level since October 2008. On Wednesday, the U.S. Federal Reserve raised rates a quarter point, to a range of 4.5 to 4.75 percent. It was the Fed’s eighth increase in a year but the smallest since March, as officials said that inflation had finally started to meaningfully ease and the global economy was less imperiled than it seemed last year.
Ms. Lagarde, the E.C.B.’s president, stressed at a news conference Thursday that the E.C.B. remained resolved to raise interest rates to the point where they would restrain economic activity and “once we are there, stay sufficiently” so interest rates return inflation to 2 percent in the medium term.
The challenge policymakers around the world face this year is determining when to halt rate increases without prematurely appearing to declare victory in their fight against inflation. There are signs that inflation has peaked in the United States, Britain and many eurozone economies. At the same time, central banks are aware of the lag effect in monetary policy, which means much of the effect of last year’s rate increases still haven’t been felt in the economy. Traders are now betting that most major central banks will only raise rates a few more times this year.
Andrew Bailey, the governor of the Bank of England, said Thursday that “we have seen a turning of the corner” on inflation. “But it’s very early days and the risks are very large.”
The Bank of England’s policymakers softened their tone on future interest rates increases, which some analysts took as an indication that the end of this tightening cycle is approaching.
On Wednesday, comments by Jerome H. Powell, the Fed chair, led to a similar reaction. “We can now say, for the first time, the disinflationary process has started,” Mr. Powell said, though he later added: “We will stay the course until the job is done.”
Ms. Lagarde’s emphasis was on the strength of inflationary pressures and the uncertainty ahead. Europe’s inflation problem has been driven by energy prices and though wholesale natural gas prices have fallen in recent months, commodity markets are inherently volatile, and will be influenced by the war raging on the eurozone’s border in Ukraine.
“The policy stance and underlying inflationary pressures in the eurozone” puts the European Central Bank in a “dramatically different position” to the Fed, Sassan Ghahramani, the founder and chief executive of SGH Macro Advisors, wrote in a note.
European policymakers remain worried that inflation in the region could last longer than expected, especially because the tight labor market is pushing up wages. Although wages are not rising fast enough to keep up with inflation and prevent households from a loss of purchasing power, there are concerns that wage agreements are rising in a way that would be inconsistent with inflation quickly returning to the central bank’s 2 percent target.
In addition, Ms. Lagarde reiterated her concerns that government fiscal supports, especially those intended to shield households from high energy costs, could add to inflationary pressures if they did not adjust to the fact that natural gas prices are lower than when these policies were set.
Ms. Lagarde opened her remarks by welcoming Croatia, which last month became the 20th country to adopt the euro.
Plans to shrink the bank’s substantial bond holdings, a remnant of its extraordinary policies that were intended to stoke economic demand, are to begin in March. The bank will unwind its asset purchase program, which holds bonds worth about 3.3 trillion euros ($3.6 trillion), by about €15 billion per month until the end of June, and the pace afterward would be decided later, it said.
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