FRANKFURT - The European Central Bank raised interest rates for the 10th consecutive time as President Christine Lagarde signalled a shift in gear towards keeping them high to choke inflation out of the economy.
While economists and investors now see the 4% level reached on Thursday as the high point for borrowing costs in the current cycle, the ECB chief insisted that she cannot yet say if that’s the case.
“With today’s decision, we have made sufficient contributions, under the current assessment, to returning inflation to target in a timely manner,” Lagarde told reporters in Frankfurt. “The focus is probably going to move a bit more to the duration, but it is not to say — because we can’t say — that now that we are at peak.”
The euro fell as much as 0.7% to $1.065 — the weakest since May — and bonds rallied as traders now see less than a 20% chance of another rate increase, reflecting growing concern over the region’s growth outlook. The yield on two-year German bonds fell four basis points to 3.13%.
A “solid majority” of ECB members supported the outcome, according to the president, who acknowledged that some of her colleagues would have preferred a pause instead.
The Governing Council repeated language that it will keep rates at “sufficiently restrictive levels for as long as necessary”. That could keep the door open to further increases should inflation prove more sticky than thought.
Meanwhile Lagarde was at pains to insist that the prospect of a future cut in borrowing costs “was not even a word that we have pronounced”.
The outcome on Thursday means yet more restrictions on euro-zone activity to squeeze out persisting price growth, dealing another blow to expansion that was already languishing.
It suggests a trade-off among policymakers where they accepted the need to inflict additional pain on the economy to bring inflation under control.
“Inflation has declined, and we want it to continue to decline,” Lagarde said. “We’re doing that not because we want to force a recession, but because we want price stability.”
New forecasts by ECB staff presented on Thursday were a key source of input for the decision. Lagarde conceded that the economy would stay “subdued” in coming months.
The new outlook shows markedly softer annual economic expansion through 2025, while inflation will weaken to average 3.2% in 2024 and then 2.1% in the final year of that outlook.
Core inflation in the euro zone, which strips out volatile items like energy and food, has barely budged in recent months and was at 5.3% in August. Euro-zone growth for the second quarter was revised lower and business surveys signalled worsening prospects for the 20-nation bloc.
The ECB decision is the first of several across developed economies over the coming days. The US Federal Reserve is meeting on Sept 19 and 20 as policymakers in Washington become more optimistic that they can tackle inflation without causing much economic damage.
The Bank of England, the Swiss National Bank and central banks in Sweden and Norway will review their policy rates on Sept 21.