The European Central Bank has raised interest rates by a quarter-point to 3.5 per cent, warning that inflation is far from vanquished.
The ECB’s decision on Thursday to raise its benchmark deposit rate to its highest level in 22 years comes as the central bank grapples with both an apparent wage-price spiral and a stagnant economy.
The bank, which raised its inflation forecast and trimmed its growth prediction for the next three years, repeated its warning that it expects inflation “to remain too high for too long” as it will not return to its 2 per cent target for another two years.
The yield on the two-year German government bond rose 0.13 percentage points to 3.18 per cent after the announcement. The euro was up 0.1 per cent against the dollar, to $1.08.
The central bank’s latest rate rise contrasts with the US Federal Reserve’s decision to pause rate increases a day before.
The ECB started raising rates several months after the Fed and, at 6.1 per cent, inflation is now higher in the eurozone than in the US.
Eurozone inflation has fallen from a record 10.6 per cent in October. But that mainly reflects lower energy costs and the ECB worries that a long period of high inflation risks a spiral of rising wages and costs that keeps price pressures elevated.
Pay per eurozone employee rose 5.2 per cent in the first quarter compared with a year ago, up from 4.8 per cent in the fourth quarter, according to ECB data published last week.
The ECB raised its forecast for core inflation to 5.1 per cent this year, 3 per cent next year and 2.3 per cent in 2025 — in part because of the strength of the labour market.
Jörg Asmussen, a former ECB executive who now runs the German insurance association, said he expected rate-setters to remain in tightening mode for some time. “I would not be surprised if markets had to correct their interest rate expectations, especially regarding the time of the first rate cut.”
Despite low unemployment, the eurozone economy remains weak, shrinking slightly for the past two quarters, although it has proved more resilient than first feared after Russia’s full-scale invasion of Ukraine.
Additional reporting by Philip Stafford
Source: Economy - ft.com
