Market Extra: European Central Bank raises rates by 25 basis points

The European Central Bank on Thursday lifted its key interest rates by 25 basis points as it continues the fight against inflation, but also signaled that its 10th straight hike may be its last.

“Inflation continues to decline but is still expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner,” the ECB said in a statement.

Market participants had been torn over prospects for a rate hike heading into the meeting. Expectations moved more decisively in favor of a further monetary tightening after Reuters reported Wednesday that the ECB staff would raise their inflation forecast for this year and next while lowering the growth forecast.

The report proved correct, with ECB estimating euro area inflation at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025 — an upward revision for 2023 and 2024 and a downward revision for 2025. The upward revision for 2023 and 2024 mainly reflects a higher path for energy prices, the ECB said. The staff significantly downgraded its forecasts for eurozone growth, looking for the economy to expand 0.7% in 2023, 1% in 2024 and 1.5% in 2025.

Thursday’s decision marked the 10th straight rate hike by the ECB, which is led by President Christine Lagarde.

Analysts focused on language in the statement that was taken as a signal the ECB may is at or near the end of its rate-hike cycle.

“Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” the ECB statement said. “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.”

“In one line: The final hike in this tightening cycle,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, in a note.

The ECB’s internal debate over Thursday’s decision was expected to be fierce, “as lingering core inflationary pressure is being counterbalanced by evidence of rapidly worsening economic conditions in the euro area,” wrote economists at ING, ahead of the decision.

The HCOB eurozone composite PMI fell to a 33-month low of 46.7 in August, on a scale where readings below 50 indicate deteriorating conditions. Eurozone GDP was revised lower for the second quarter to show a scant 0.1% quarter-on-quarter growth. 

The euro
was down 0.5% versus the U.S. dollar at $1.068 after touching its lowest versus the greenback since late May, a move exacerbated by a round of strong U.S. economic data.

—Steve Goldstein contributed.

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