ECB raises rates by 0.5 percentage points as Lagarde ‘continues to study’

The European Central Bank raised interest rates by half a percentage point on Thursday and pledged to do the same in March, as its president, Christine Lagarde, warned that eurozone inflation was “too high”.

The ECB decided to press for serious tightening after raising the benchmark deposit rate to 2.5 percent, saying in a post-meeting statement that it would raise rates at a “sustainable pace.” It has confirmed another half-point hike to follow at its next monetary policy meeting on March 16.

“We know we’re covering, we know we’re not done,” Lagarde told a post-decision press conference, adding that rate-setters already had enough evidence to believe a significant rate hike would be needed. “Inflation is too high,” he said, adding that the deflationary process in the eurozone has yet to start.

The bank’s commitment to pursuing substantial rate hikes sets it apart from its UK and US peers, which signaled this week that interest rates are nearing a peak.

The ECB’s move follows a half-point increase by the Bank of England on Thursday and a quarter-point hike by the US Federal Reserve on Wednesday. However, the Fed has slowed the pace of tightening on signs that some price pressures are dissipating in the US, with Chairman Jay Powell expressing confidence this week that inflation will reach the Fed’s 2 percent target without a “really significant economic slowdown.” . The BoE has also hinted that interest rates may now peak at 4 per cent.

The eurozone’s central bank has so far raised borrowing costs by 3 percentage points since it began raising interest rates – a smaller amount than the UK and US central banks.

After March, the ECB said it would “assess the subsequent path of its monetary policy,” which some market participants took as bad news, suggesting that interest rates could be nearing a peak.

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The euro was down 0.89 percent against the dollar at $1.088 by midday, while in fixed-income markets, the 10-year German Bund yield, the regional benchmark, was down 0.2 percentage points at 2.09 percent. The yield on the equivalent Italian government bond fell 0.36 percentage points to 3.92 percent. A rise in price reduces the returns on bonds.

But while the pace of rate hikes may slow from May, Lagarde made it clear that the ECB is unlikely to be ready to pause by then.

“The question is how much more to hike after March, not whether to hike more,” said James Rossiter, head of global macro strategy at TD Securities.

The decision is in line with the hawkish rhetoric adopted by Lagarde since December. Since then, the eurozone economy has proved more resilient than expected, helped by warmer weather and government support to help households and businesses cope with rising energy bills.

While strong growth will be welcomed by policymakers, they will find it difficult to contain underlying price pressures and return inflation to their 2 percent target.

Data released this week showed the headline rate of inflation fell more than expected, falling to 8.5 percent last month from 9.2 percent in the year to December. But the eurozone’s core inflation – which excludes changes in food and energy prices and is seen as a better indicator of longer-term price pressures – was unchanged at an all-time high of 5.2 percent.

Along with the decision on interest rates, the ECB set out more details of plans to begin shrinking its balance sheet from next month by buying fewer bonds from the proceeds of maturing bonds it owns.

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It aims to reduce its portfolio by €15bn per month from March to the end of June, with partial reinvestments widely conducted in line with current practice. However, for corporate bond purchases, reinvestments will be “more strongly skewed towards issuers with better climate performance”, the ECB said.

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