European Central Bank raises interest rates to highest level since 2001

European Central Bank raises interest rates to highest level since 2001

The European Central Bank on Thursday raised interest rates to the highest level in more than two decades as policymakers continued their campaign to stamp out inflation they said was forecast to remain too high for too long .

The bank, which sets rates for the 20 countries that use the euro currency, raised rates by a quarter percentage point, keeping the deposit rate at 3.5 percent, the highest since 2001. This was the eighth consecutive increase of the bank. The move has been well telegraphed since the last meeting of the Governing Council in early May, when policymakers expressed concern about underlying inflationary pressures from rising wages and corporate profits or the impact of rising food prices. .

The decision comes a day after the Federal Reserve kept interest rates steady for the first time in more than a year. After last month’s mirror image move, when both raised rates by a quarter point, the two central banks have begun to diverge again, partly because the European Central Bank as the Fed has long or Not increasing interest rates for higher.

Policymakers say they want to avoid the risk of prematurely declaring victory in their fight against rising prices, even as the eurozone’s annual rate of inflation eases from its double-digit peak late last year. fell to 6.1 percent in May, which is the slowest pace compared to last year. One year Much of the slowdown can be attributed to lower wholesale energy costs, but central bankers have been alert to signs that inflation is becoming embedded in the economy, which could prevent them from getting inflation back to the 2 percent target.

The central bank forecasts inflation to average 5.4 percent this year but still remain above target at 2.2 in two years’ time. The percentage is slightly higher than the previous estimates set three months ago.

“Inflation is easing, but it is expected to remain very high over the long term,” the bank said in a statement on Thursday.

But as inflation slows, the question of how much to tighten policy by the right amount has become a difficult one. Too much Can excessively block the economy and cause or worsen a recession. Too little may allow inflation to become a persistent problem that policy makers cannot root out. This is a challenge facing central bankers around the world.

On Wednesday, the Fed did not raise interest rates, saying they were giving themselves time to assess how the economy was responding to the rapid pace of previous rate hikes. But policymakers warned they may have to raise rates again later. Such a pattern has recently been established in Australia and Canada, where central banks held rates steady for short periods before starting to hike rates.

In May, the European Central Bank slowed the pace of its rate hikes as it acknowledged the impact that tighter monetary policy was having on the region’s economy through more restrictive lending conditions at banks. On Thursday, the bank said tighter financing conditions are expected to sharply reduce demand.

“Future decisions of the Governing Council will ensure that key ECB interest rates will be brought down to sufficiently restrictive levels to achieve a timely return of inflation to the 2 per cent medium-term target,” the bank said in its statement. . At those levels as long as necessary.

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