The European Central Bank (ECB) has raised interest rates on Thursday to 3.75 percent, mirroring the move made by the US Federal Reserve, as part of its efforts to combat inflation.
This marks the ninth consecutive increase by the ECB, pushing the closely-monitored deposit rate to 3.75 percent, a level not seen since May 2001 and matching its previous record peak.
Christine Lagarde, President of the ECB, remarked that the economic prospects for the eurozone have worsened and hinted at the possibility of another rate hike next month.
"While inflation is on a downward trajectory, it remains stubbornly high and is expected to persist at elevated levels for an extended period," stated the ECB. "Though certain indicators suggest some moderation, the underlying inflationary pressures remain substantial."
The impact of the previous rate hikes remains pronounced, exerting notable tightening on financial conditions and progressively dampening consumer demand, which is a crucial factor in bringing inflation back in line with the target.
In a parallel move, the US Federal Reserve implemented a 25 basis points increase in interest rates on Wednesday, marking its 11th such hike since March 2022, as part of its efforts to counteract inflationary pressures in the United States.
The ECB's communication implies the necessity of attaining a sufficiently high rate level to swiftly counteract inflation, a nuanced alteration that may be interpreted as a signal that further increments are not predetermined.
Reduced domestic demand and elevated inflation are collectively constraining supply and burdening the manufacturing sector. The momentum is also subsiding within the service sectors, observed Ms. Lagarde, who additionally emphasized that governments must avoid stoking inflation as the energy crisis subsides.
"It is imperative for fiscal policies to be formulated with the objective of enhancing economic productivity," she underscored.
In relation to the near-term economic outlook for the eurozone, a decline is projected, primarily driven by weakened domestic demand.
Elevated inflation and tightened financial conditions are impeding expenditures, particularly affecting manufacturing output, which is further hampered by subdued external demand.
Anticipatedly, the economy is forecasted to remain feeble in the immediate term. However, with time, decreasing inflation, escalating incomes, and improved supply conditions are projected to bolster the recovery process.
"We maintain an open stance concerning the determinations for September and subsequent meetings. Thus, there exists a possibility of both a hike and a hold," elucidated Ms. Lagarde.
Notably, she clarified that if the central bank chooses to pause the interest rate hike cycle, it does not necessarily imply an extended period of stagnation.
Ahead of the ECB's announcement, the euro exhibited an upward trajectory against a softened US dollar.
"Having established a precedent with the recent upward revision of internal inflation forecasts, the ECB now finds itself, akin to other central banks, in a complex position of harmonizing still uncomfortably high [core] inflation with the evident – albeit incomplete – influence of previous rate hikes on households and businesses," remarked Des Lawrence, Senior Investment Strategist at State Street Global Advisers.
He continued, "We consider a 25 basis point rate increase at the September meeting to be a reasonable possibility, given the ongoing elevated inflation figures and projections. Beyond this point, there is a strong argument in favor of maintaining policy rates at these levels for a sustained duration."
The ECB had elevated its benchmark interest rate by 25 basis points to 3.5 percent in the preceding month.
Jerome Powell, Chair of the US Federal Reserve, adopted a non-committal stance on the potential for an additional policy rate hike within the year, and indicated that the Federal Reserve's personnel no longer anticipate a recession.
Nevertheless, futures markets continue to indicate a probability of less than 50 percent for another rate adjustment.
In sync with the US Federal Reserve's elevation of its key interest rate to a 22-year peak to mitigate inflation and reinstate price stability, the central banks of the UAE, Saudi Arabia, Bahrain, Kuwait, Oman, and Qatar also raised their benchmark borrowing rates.
The upcoming week will see the Bank of England provide an update on British interest rates.