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After 10th Time Raising Rates, European Central Bank Signals It Might Be Done


The European Central Bank on Thursday raised interest rates for a 10th consecutive — and perhaps final — time in the bank’s effort to force inflation down.

The bank lifted its three key interest rates by a quarter of a percentage point, raising the deposit rate to 4 percent, the highest in the central bank’s two-decade history.

“Inflation continues to decline but is still expected to remain too high for too long,” Christine Lagarde, the president of the bank, said on Thursday. Policymakers increased rates to “to reinforce progress” on reining in inflation, she said.

But in a signal that the latest increase may be the final one, Ms. Lagarde said that she and her fellow policymakers considered that “interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target” of 2 percent.

Approaching Thursday’s meeting, the bank’s decision was seen as almost a coin toss between raising rates or keeping them steady, as policymakers weighed progress in lowering inflation against their determination not to declare victory too early. Bets by investors in financial markets tilted toward a slightly higher chance that the bank would raise rates rather than keep them steady.

Next week, policymakers at the Federal Reserve and Bank of England will set interest rates. Fed officials are widely expected to hold rates steady, but a recent acceleration in inflation in the United States could keep open the debate about another increase later in the year.

In Britain, officials will get new inflation data right before the policy meeting, which could sway expectations, though investors are currently betting that there is a bigger chance interest rates will be pushed higher than not. That would be the bank’s 15th consecutive rate increase.

Over the past year, the European Central Bank has embarked on its most aggressive period of monetary policy tightening, raising rates from negative levels in July last year to a record high. During that time, inflation in the eurozone, which reached a double-digit peak in October, has since halved.

“Is it satisfactory?” Ms. Lagarde said. “No.”

Consumer prices rose 5.3 percent in August compared with a year earlier, the same pace as the previous month and defying economists’ expectations for a slowdown because of a jump in fuel prices. At the same time, domestic inflationary pressures, which policymakers are watching closely, were still strong. Core inflation, which strips out food and energy prices, was 5.3 percent.

On Thursday, the central bank published new economic projections by its staff, which said that inflation would be slightly higher this year and next than forecast three months ago because of higher energy prices. In 2025, inflation would be just above the bank’s 2 percent target, so policymakers have tried to lay the ground for a long period of high interest rates that would restrain the economy further. Already, demand for loans from businesses and households has weakened and banks are tightening their lending standards.

Previous rate increases were being “transmitted forcefully” into the economy, Ms. Lagarde said at a news conference in Frankfurt, adding that the strength of this pass-through was even faster than in previous times the central bank had raised interest rates. “Financing conditions have tightened further and are increasingly dampening demand, which is an important factor in bringing inflation back to target.”

The bank also downgraded its forecasts for economic growth over the next three years, with the economy growing just 0.7 percent this year.

“We are going through a phase of very sluggish growth,” Ms. Lagarde said. “The difficult times are now,” and the projections for an economic recovery have been pushed further into 2024, she added.

Earlier this week, the European Commission cut its forecasts for the region’s economy, projecting that the eurozone would grow 0.8 percent this year, down from a forecast of 1.1 percent made four months ago. The economy would also grow more slowly next year.

Germany, the region’s largest economy, is stagnant as its industrial sector suffers under the weight of high interest rates and other costs. Last month, business activity fell at its fastest rate in more than three years.

“Against the weaker growth backdrop, the E.C.B. can probably pause at the next meeting, and if the growth outlook continues to deteriorate, a pause could morph into a peak,” Mike Bell, a strategist at JPMorgan Asset Management, said in a written comment. Unless the region’s unemployment rate rises sharply, rates could be on hold for “quite some time,” he added.

Amid this deteriorating economic outlook, traders are betting that the central bank won’t start to cut interest rates until the second half of next year.

Ms. Lagarde said policymakers hadn’t even begun to discuss the idea of cutting interest rates, and when speaking to reporters, she pushed back on the idea that this was definitely the last interest rate increase, to maintain flexibility about future decisions. She said the view that rates were sufficiently high to bring down inflation was based on only the “current assessment” of data and that the outlook could change.

There have been signs of division among the 26-member Governing Council of the central bank about the best path forward for interest rates. Eurozone inflation ranges from 2.4 percent in Spain and Belgium to 9.6 percent in Slovakia. At the same time, the levels of indebtedness and prevalence of variable-rate mortgages differ across countries, so the impact of higher interest rates is felt more quickly in some countries than in others.

Earlier this month, Klaas Knot, the head of the Dutch central bank, told Bloomberg News that markets were underestimating the chance of an interest-rate increase in September, and Peter Kazimir, the Slovak central bank’s chief, urged “one more step.” But Mário Centeno, the governor of Portugal’s central bank, warned of “overdoing” it.

The disagreement was confirmed by Ms. Lagarde on Thursday, who said the rate increase wasn’t a unanimous decision. While a “solid majority” of the council supported the increase, she said, some would have preferred a pause while waiting for more information on the impact of past rate increases.

In the future, interest rates will be set at “sufficiently restrictive levels for as long as necessary,” Ms. Lagarde said, reiterating that decisions will be made depending on the latest economic and financial data, inflation measures that capture domestic price pressures, and the strength of monetary policy’s impact on the region’s economy.



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