ECB hikes again, US pauses
The European Central Bank pressed ahead with another interest rate hike Thursday, aiming to crush inflation that is driving up the cost of groceries, utility bills and summer vacations even after the US Federal Reserve took a break from its own string of increases.
The ECB’s governing council, which decides interest rate policy for the 20 countries that use the euro currency, increased its benchmark rate by a quarter-percentage point, to 3.5 per cent.
“Inflation has been coming down but is projected to remain too high for too long,” the bank said in a statement.
It was the eighth straight increase since July 2022, an unprecedentedly swift campaign to tighten the flow of credit to the economy as the bank seeks to return inflation to its target of 2.0 per cent from 6.1 per cent.
The ECB’s own projections acknowledge that controlling inflation will take months longer even as it’s fallen from a double-digit peak late last year.
The decision was widely expected, and many analysts think one more quarter-point hike is in the cards for the bank’s next meeting on July 27. ECB President Christine Lagarde’s remarks at a news conference Thursday will be scrutinized for clues about when rate increases might finally top out.
Central banks around the world are trying to wrestle down price spikes that have been squeezing households and businesses with higher bills for basics like food and rent but some are starting diverge in their decisions to avoid plunging their economies into further trouble.
In the United States, the Federal Reserve suspended its series of rate hikes Wednesday as it assesses the impact of higher rates on economic growth and jobs. It takes months for rate hikes to work their way through to the economy, and a pause can be a chance to see if the medicine is working.
Nonetheless, Fed projections indicate two more rate hikes are possible this year.
Central banks in Australia and Canada resumed rate increases last week after a pause — one sign of how widespread high inflation has become ingrained in the global economy.
Higher rates fight inflation by raising the cost of borrowing for auto loans, mortgages and credit cards, reducing demand for goods that drives prices higher. But they also can weaken the economy and raise the risk of throwing the economy into recession.
That is a concern in Europe, where the economy contracted slightly in the last months of 2022 and the first three months of this year. Two straight quarters of falling output is one definition of recession.
But the job market is strong, with unemployment at its lowest since the euro currency was introduced in 1999 — at 6.5 per cent — and hardly consistent with a real recession. It also signals more wage increases that could worsen inflation as employers compete for scarce workers.
The Euro Area Business Cycle Dating Committee, which uses employment as well as economic growth data in determining when a recession has occurred, found no recession at its last assessment March 27 and will revisit the question in November.