European Central Bank Raises Rates Again as Eurozone Inflation Persists
The European Central Bank raised interest rates on Thursday to the highest levels since 2008, maintaining an aggressive policy even as the eurozone’s overall inflation rate appears to have peaked.In a well-telegraphed move, the central bank raised its three interest rates by half a percentage point, lifting the benchmark deposit rate to 2.5 percent.
The E.C.B. said in a statement that it would “stay the course in raising interest rates significantly at a steady pace,” and indicated that further increases could be expected, including another increase of half a point in March.
“Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations,” the bank said in a statement.
Europeans face tight financial conditions as the war in Ukraine continues into a second year, but the region has been surprisingly resilient to recent economic turmoil. Data published on Tuesday showed that the countries that use the euro had forestalled a recession late last year, and other economic indicators suggest the outlook is brighter than expected just a few months ago, in large part because natural gas prices have come down from their peak in August.
Still, significant risks remain, particularly from persistent inflationary pressures. A recession may be avoided this year, but the eurozone is likely to experience a sharp economic slowdown as the effects of higher interest rates constrain the economy and inflation eats away at household budgets.
On Wednesday, data showed that the annual rate of inflation in the eurozone fell to 8.5 percent in January, from 9.2 percent the previous month. The data suggested inflation peaked in October, at 10.6 percent, but policymakers insist that the battle against high inflation in the region still hasn’t been won.
In several countries, including France and Spain, the rate of inflation rose in January. Core inflation, a measure closely watched by policymakers because it indicates how deeply rising prices are embedded in the economy, remains stubbornly high. In January, the annual rate of core inflation, which excludes food and energy prices, was 5.2 percent, the same as the previous month.
The E.C.B.’s action came nearly an hour after the Bank of England raised its benchmark rate half a point, to 4 percent — its highest level since October 2008. On Wednesday, the U.S. Federal Reserve raised rates a quarter point, to a range of 4.5 to 4.75 percent. It was the Fed’s eighth increase in a year but the smallest since March, as officials said that inflation had finally started to meaningfully ease and the global economy was less imperiled than it seemed last year.
