The European Central Bank pressed ahead with another interest rate hike on Thursday and pledged more are on the way, aiming to crush inflation that is driving up the cost of groceries, utility bills and summer vacations even after the US Federal Reserve took a break from its own string of increases. The boost of a quarter-percentage point, to 3.5 per cent, is the eighth straight increase since July 2022 for the 20 countries that use the euro currency.
That is an unprecedentedly swift campaign to tighten the flow of credit to the economy as the bank seeks to return inflation to its target of 2 per cent from 6.1 per cent. ECB President Christine Lagarde said more hikes, including at the bank’s next meeting on July 27, are in the cards.
Are we done? Have we finished the journey? No, we’re not at destination. Do we still have ground to cover? Yes, we have ground to cover, she said at a news conference. Lagarde said the bank will continue to hike at our next meeting. So we are not thinking about pausing, as you can tell.
Central banks around the world are trying to wrestle down price spikes that have been squeezing households and businesses with higher bills for basics like food and rent but some are starting diverge in their decisions to avoid plunging their economies into further trouble. The US Federal Reserve suspended its series of rate hikes on Wednesday as it assesses the impact of higher rates on economic growth and jobs. It takes months for rate hikes to work their way through to the economy, and a pause can be a chance to see if the medicine is working.
Nonetheless, Fed projections indicate two more rate hikes are possible this year. Central banks in Australia and Canada resumed rate increases last week after a pause one sign of how widespread high inflation has become ingrained in the global economy. Carsten Brzeski, global head of macro for ING bank, said the ECB is increasingly taking the risk of worsening the economic outlook.
Still, despite good arguments against further rate hikes, the ECB simply cannot afford to be wrong on inflation, he said in a research note. The Bank wants and has to be sure that it has slayed the inflation dragon before considering a policy change. Higher rates fight inflation by raising the cost of borrowing for auto loans, mortgages and credit cards, reducing demand for goods that drives prices higher. But they also can weaken the economy and raise the risk of throwing the economy into recession.
That is a concern in Europe, where the economy contracted slightly in the last months of 2022 and the first three months of this year. Two straight quarters of falling output is one definition of recession. But the job market is strong, with unemployment at its lowest since the euro currency was introduced in 1999 at 6.5 per cent and hardly consistent with a real recession. It also signals more wage increases that could worsen inflation as employers compete for scarce workers.
The Euro Area Business Cycle Dating Committee, which uses employment as well as economic growth data in determining when a recession has occurred, found no recession at its last assessment March 27 and will revisit the question in November. Consumer prices started rising as the global economy bounced back from the COVID-19 pandemic and created supply chain bottlenecks. Oil and natural gas prices also spiked due to Russia’s threats against Ukraine and after its February 2022 invasion.
That also sent food and fertilizer prices soaring amid disruption to supplies from the warring countries, both major agricultural exporters. Those pressures are starting to ease, but the initial burst of inflation is being reflected in higher wage demands and prices for services, even as energy prices have fallen in Europe in recent months.
Home prices in Europe started to fall in the last months of 2022, the first dip since 2015, one sign that the ECB’s policies are feeding through to the economy as mortgage costs deter homebuyers.
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