ECB raises interest rates, signals more in fight against high inflation

On February 2, 2023, European Central Bank President Christine Lagarde spoke at a press conference on the eurozone's monetary policy in Frankfurt am Main, western Germany. PHOTO AFP FRANKFURT - The European Central Bank raised interest rates by 0.5 percent on Thursday and explicitly signalled at least one more hike of the same magnitude next month, confirming that it would stay the course in the fight against high inflation.

The financial markets immediately interpreted the move as suggesting the tightening cycle might end soon - just as they did on Wednesday after US Federal Reserve chief Jerome Powell said there were signs that inflation was easing.

The ECB has been increasing rates at a record pace to fight inflation, which is the result of the COVID 19 epidemic and an energy crisis that followed Russia's special military operation in Ukraine nearly a year ago.

The central bank for the 20 countries that share the euro has raised the rate it pays on bank deposits by another half-percentage point to 2.5 percent, in line with what it said in December and with market expectations.

ING's global head of macro Carsten Brzeski said the ECB was opening the door to a pause or a slower rate hike pace beyond March, a view that was reflected in market moves as Germany's 10 year yield fell 15 bps to 2.14 percent.

The hiking cycle was close to the end because of the interpretation that Thursday's move meant that the hiking cycle was close to the end, disputed by ECB President Christine Lagarde.

Lagarde said that we have ground to cover but we know that we are not done. Lagarde reiterated the bank's mantra that it will stay the course in the fight to bring inflation back to its target of around 2 percent.

After the Fed slowed the pace of hikes and acknowledged that disinflation was underway, the disconnect between the ECB message and market interpretation reflected that on Wednesday after the Fed slowed the pace of hikes and reaffirmed that borrowing costs needed to rise further.

ALSO READ: Lagarde: ECB must keep raising rates despite the recession risks.

The US 10 year Treasury yield was down 3 bps at 3.36 percent after falling as much as 13 bps on Wednesday after the Fed meeting.

Before the ECB decision, investors and economists were expecting the European Central Bank to raise its deposit rate by another 50 basis points in March and get it to a peak of 3.25 percent 3.50 percent by the summer, which would be the highest since the turn of the century.

The ECB is slowly whittling down the multi-trillion euro stock of bonds it has been accumulating over the last decade as it tried to boost inflation, which was then too low.

It said on Thursday that any proceeds from maturing bonds would be allocated proportionally to the share of redemptions. Remaining reinvestments from corporate bonds would be tilted more strongly towards issuers with a better climate performance, according to the European Central Bank.

Headline inflation has fallen rapidly since peaking at a record 10.6 percent in October, but core prices, which exclude volatile items such as food and fuel, have been rising at a steady or accelerating pace.

Economist: ECB to inflict pain as it hikes rates into next year.

In the final three months of 2022, the euro zone unexpectedly eked out growth, but that was largely due to an exceptionally mild winter and a stellar performance by Ireland.

Since the debt crisis in 2011 banks have been tightening access to credit - usually a harbinger of lower growth and slower inflation, according to an ECB survey.

In December, the ECB said rates would be increased at a steady pace until it was happy inflation was heading back down to its 2 percent target.

It has become a source of confusion for investors and the Governing Council, as headline inflation fell sharply while price growth was still inching up.