ECB slows rate hikes but pledges more to keep up inflation fight  

 

  • The European Central Bank eased the pace of its interest rate hikes on Thursday but stressed significant tightening remained ahead and laid out plans to drain cash from the financial system as part of a dogged fight against runaway inflation.
  • After being wrong-footed by sudden price rises, the ECB has been raising rates at an unprecedented pace. Inflation has soared since economies reopened after the COVID-19 pandemic, driven by supply bottlenecks and then surging energy costs following Russia's invasion of Ukraine.
  • In a move shadowing similar steps this week by the Federal Reserve and Bank of England, it raised the rate it pays on bank deposits by 50 basis points to 2%, moving further away from a decade of ultra-easy policy. That decision, which was expected, marked a slowdown in the pace of tightening from 75-basis-point increases at each of the ECB's two previous meetings, as price pressures show some signs of peaking and a recession looms.
  • But to secure a majority for that slowdown, ECB President Christine Lagarde had to offer dissenters a pledge that rates will be increased again, potentially as many as three times, by the same amount. Money markets immediately moved to price in a peak deposit rate of just over 3% by July, compared to 2.75% before the meeting. The ECB is pushing hard to persuade investors of its commitment to fighting higher prices after lagging the Fed and BoE in raising rates.
  • The ECB's new projections on Thursday showed inflation above the ECB's 2% target through 2025. ECB President Christine Lagarde said inflation may still come in higher than that, citing the possibility of a bout of stronger-than-expected wage growth and of a boost to demand from government support measures across the 19 eurozone countries.

(Source: Reuters)