The European Central Bank (ECB) has taken further action to combat the sudden bout of high inflation in the euro zone, raising interest rates again by half a percentage point to 2.5 per cent. The move, which was in line with market expectations, marks the fifth consecutive rate hike by the ECB, and the bank has signaled that it will continue to raise rates at least once more in March, with a further hike of the same magnitude. The decision comes as the ECB battles to bring inflation back down to its 2 per cent target, following a surge in prices caused by factors such as the aftermath of the Covid-19 pandemic and the energy crisis sparked by Russia’s invasion of Ukraine.
The ECB’s move was widely expected, as investors and economists had predicted a 50-basis-point hike in March, with some forecasting that rates could peak at 3.25/3.50 per cent by the summer. The bank’s decision to raise interest rates at a record pace is aimed at tackling the high inflationary pressures that have been building in the euro zone. The ECB has also indicated that it will continue to evaluate the subsequent path of its monetary policy, taking into account the underlying inflation pressures and the economy’s response to its previous rate hikes.
The President of the European Central Bank
Despite the ECB’s decision to raise rates, the recent economic data out of the euro zone has painted a mixed picture. Headline inflation has been declining rapidly since peaking in October, while core prices have been rising at a steady or accelerating pace. The euro zone also unexpectedly eked out growth in the final three months of 2022, largely due to an exceptionally mild winter and a stellar performance by Ireland. However, the ECB’s survey showed that banks are tightening access to credit, which could be a sign of slower growth and inflation ahead.
The ECB’s decision has also sparked controversy within the bank, with some policymakers favoring larger rate hikes and others advocating for smaller moves or a pause in rate increases. ECB President Christine Lagarde will hold a press conference later today to provide further guidance on the bank’s decision and its thinking on the euro zone’s economic outlook. With the ECB committed to maintaining a tighter monetary policy until inflation is fully back under control, investors will be closely watching Lagarde’s comments for any sign of a shift in the bank’s stance on interest rates.
