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 would remain too high for too long.
The bank, which sets rates for the 20 countries that use the euro, raised rates by a quarter of a percentage point and raised the deposit rate to 3.5 percent, the highest since 2001. It was the bank’s eighth consecutive increase. This move has been well received since the last Governing Council meeting in early May, when policymakers expressed concerns about underlying inflationary pressures from wage growth and corporate profits or the impact of rising food prices.
The decision comes a day after the Federal Reserve held interest rates stable 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 began to drift apart again, in part because the European Central Bank has not raised interest rates as long or as high as the Fed.
Policymakers say they want to avoid the risk of prematurely declaring victory in their battle against price increases, even as eurozone inflation has fallen year-on-year from its double-digit peak late last year to 6.1 percent in May, its slowest pace in more than a 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 hinder them from getting inflation back to the 2 percent target.
The central bank forecasts that inflation will average 5.4 percent this year, but will still be above the target of 2.2 in two years’ time. percent, slightly higher than previous forecasts from three months ago.
“Inflation is falling, but is expected to remain too high for too long,” the bank said in a statement Thursday.
But as inflation slows, how much policy tightening is the right amount is hard to gauge. Too many could slow down the economy more than necessary and cause or exacerbate a recession. Too little can make inflation a persistent problem that policymakers cannot eradicate. It is a challenge facing central bankers around the world.
On Wednesday, the Fed did not raise interest rates, saying it was giving itself time to assess how the economy is responding to the rapid pace of past rate hikes. But policymakers warned they may have to raise rates again later. Such a pattern has recently been observed in Australia and Canada, where central banks briefly held interest rates stable before resuming rate hikes.
In May, the European Central Bank slowed the pace of its rate hikes as it recognized the impact of tighter monetary policy on the region’s economy from tighter credit conditions at banks. On Thursday, the bank said tighter financing conditions are expected to increasingly dampen demand.
“The future decisions of the Governing Council will ensure that key ECB interest rates are set at levels sufficiently restrictive to achieve a timely return of inflation to the medium-term target of 2 percent,” the bank said in a statement. her statement. at those levels for as long as necessary.”