Thursday, the European Central Bank hiked interest rates for the 5th time in a row and said there would be another half-point increase in March. They are continuing to tighten policy even though some of their global counterparts are moving slower.
In order to stop inflation from getting out of control, the European Central Bank (ECB) has brought up its key interest rate by an unheard-of 3% in just seven months. All of that in the hopes that higher cost of borrowing will slow down demand and keep prices from going up too quickly.
As promised in December, the ECB raised the rate from 2% to 2.5% at its initial conference of the year. But it didn’t do what the Fed did and make it clear that policy tightening would slow down.
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As expected, the ECB raised interest rates by 50 basis points, which is similar to what the dovish BOE did this morning when it raised rates by 50 basis points but hinted that this hiking cycle might be over. This caused the British pound to fall.
The central bank hinted a dovish spin on the way forward. The ECB said it plans to raise rates by another 50 basis points (bps) in March and will only then “evaluate the future path”.
It’s basically dovish, as during a press conference in December, Lagarde said we might see possibly three extra 50bps hikes. Now, she doesn’t think that will happen. Instead, the Governing Council expressed a shift to a meeting-by-meeting decision making.
This is a change opposed to December, when the ECB still anticipated to “raise rates significantly more because inflation is still too high and is predicted to remain higher than required”. In December it further said that “rates will still need to go up steadily and by a lot.”
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The rate of underlying inflation, which is a key indicator of how stable price growth is, has been stuck at high levels not seen for decades. Wage growth, which is another key indicator of inflation, is evidently picking up speed. The job market is also tough because the unemployment rate is at a record low.
In recent weeks, policymakers have become more divided about the future of interest rates. This is because the data coming in was mixed and could support both faster and easier rate hikes. The US Federal Reserve already eased up on the hiking and raised only by 25 basis points.
The whole ECB statement on the February 2nd can be found here
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