The European Central Bank lifted interest rates by another quarter-point while keeping options for the next meeting open as its unprecedented hiking campaign nears an end.
A ninth straight increase since last July brought the deposit rate to 3.75 per cent on Thursday – as economists expected. The lack of guidance for September’s decision means the ECB may raise again, or hold, depending on the strength of its conviction that inflation is headed back to the 2 per cent goal.
“The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2 per cent medium-term target,” the ECB said in a statement. “The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.”
The Governing Council also decided to set the remuneration of minimum reserves at 0 per cent.
Like in the US, where the Federal Reserve hiked rates on Wednesday, analysts and investors reckon the ECB is now at – or one step away from – a peak in borrowing costs. Officials in Frankfurt, though, must tread delicately as their tightening to date is increasingly felt. Growth in the euro-zone economy is precarious, while demand for bank loans has plunged.
While it usually takes 12-18 months for monetary-policy shifts to fully hit home, evidence is mounting that the effect of ECB’s yearlong bout of hikes is reaching firms and households.
Alongside the steepest-ever drop in demand for corporate credit in the euro area, the bloc’s top economy – Germany – is struggling to exit a recession. The continent’s services sector, meanwhile, is starting to wobble, following persistent weakness in manufacturing.
The hope is that slower economic expansion will damp inflation sufficiently – a so-called soft landing. But price pressures remain. Core inflation, a closely watched metric that excludes energy and food, quickened last month to match the 5.5 per cent headline reading.
In the run-up to this week, most ECB policymakers offered little guidance on where they see rates going beyond July – reiterating simply that whatever peak is reached will be maintained for an extended period.
Even traditionally hawkish officials including Bundesbank President Joachim Nagel and Dutch Governor Klaas Knot say September remains open and will hinge on data.
source: gulfnews.com
