A tenth increase in a row in one year. There European Central Bank (ECB) raised its interest rate on Thursday benchmark at its highest level since 1999, defying those who called for a truce. This decision was taken so as not to worsen the slowdown in economic activity in the euro zone, explains the organization.
After this tenth increase in a row since July 2022, the Frankfurt institution signaled that its draconian cycle of monetary tightening was coming to an end, but without being able to ure that “the peak” of rates had been reached. “We cannot say that we have reached the peak,” Christine Lagarde, president of the ECB, told reporters.
While estimating that rates have reached levels which will make “a substantial contribution” to the desired reduction in inflation, she added that the institution’s next decision on the matter will depend on “economic data”. To bring prices down sufficiently and halt the spiral of inflation, rates will need to be maintained at their levels “for a sufficiently long period of time”, warned the Governing Council at the end of its meeting.
Inflation “too high for too long a period”
The ECB has chosen to stay the course, fourteen months after launching the fastest and largest rate increase cycle in its history, by 4.50 percentage points to date. A decision that she justifies by erting that “if inflation continues to slow, it will still remain too high for too long a period”.
The European Monetary Institution also raised its inflation forecasts for 2023 and 2024 on Thursday, due to the impact of energy prices. The monetary institution now forecasts a price increase of 5.6% in 2023, then 3.2% in 2024 and 2.1% in 2025, getting closer to its medium-term objective of 2.0%.
She faced a dilemma on Thursday, making her decision more uncertain than ever, as economic activity in the euro zone shows real signs of contraction. The monetary tightening of recent months has led to a surge in borrowing costs for households and businesses, influencing the demand and therefore the distribution of credit. “We are clearly in a period of slow and sluggish growth,” said Christine Lagarde.
Despite protests, the tenth rate increase in a row was decided by “a solid majority” of the Governing Council, even if some members would have “preferred a pause”, admitted the central banker. Faced with inflation considered stubborn, the risk of not doing enough appeared higher than the risk of doing too much.