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The European Central Bank has raised interest rates to an all-time high in a bid to cool consumer prices, despite faltering growth in the eurozone.
The ECB’s knife-edge decision to lift its deposit rate for the 10th consecutive time, by 25 basis points to 4 per cent on Thursday, came as officials cut their growth forecasts for the eurozone economy.
The euro fell 0.24 per cent against the dollar to $1.07 after the decision by the ECB’s s governing council in Frankfurt. Yields on interest rate sensitive two-year German Bunds, viewed as a benchmark for the eurozone, fell 0.04 percentage points to 3.13 per cent.
Many economists predict major central banks are nearing the end of their rate rises since inflation is falling and growth is slowing under pressure from higher borrowing costs.
The ECB’s decision was the most consequential for more than a year, with more dovish governing council members pointing to signs of weaker growth, slowing bank lending, a cooling labour market and falling inflation to argue for a pause. But hawks worried inflation was still too high.
The US Federal Reserve and Bank of England will meet next week.
Thursday’s decision takes the ECB deposit rate above the previous record high in 2001, when rate-setters raised borrowing costs to boost the value of the newly launched euro.
The decision shows policymakers remain more worried about the risk of consumer price growth staying above target than the danger of a sharp economic downturn.
Economists have trimmed eurozone growth forecasts in recent weeks after industrial production and retail sales fell in July and business surveys pointed to a further downturn in August. Rate-setters think slowing economic activity is likely to cool price pressures.
Eurozone inflation has already dropped from a peak of 10.6 per cent last year to 5.3 per cent in August.
Inflation is expected to keep falling, although it is not anticipated to reach the ECB’s 2 per cent target until 2025. The recent rebound in oil prices has raised concerns that the disinflation process will be bumpy.
