by Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) – The European Central Bank (ECB) decided on Thursday to raise interest rates for the eighth time in a row and left the door open for further hikes, continuing to tighten monetary policy despite the signs of economic weakness in the euro zone.

As expected by the markets, the ECB chose to raise its rates by a quarter of a point, bringing its deposit rate to 3.50%, its highest level in 22 years.

It also announced that it expects inflation to remain above its 2% target until 2025 inclusive.

“Future decisions by the Governing Council will ensure that the key ECB interest rates are set at sufficiently restrictive levels to ensure that inflation returns to the 2% target level as soon as possible over the medium term. term, and that they are maintained at these levels for as long as necessary”, declared the President of the ECB during a press conference.

Christine Lagarde added that wage and price increases by companies are becoming increasingly important factors of inflation.

In the aftermath of the Federal Reserve’s pause in its cycle, observers are wondering how big the next rate hikes will be in the zone and for how long rates will stay high.

But inflation in the euro zone, at 6.1% over one year, remains at a higher level than in the United States and excluding unprocessed food products and energy, price growth is slowing down slowly.

This is what encourages the ECB to persevere, in particular after having been taken on the wrong foot at first by the surge in prices and started to raise rates a few months behind the other major issuing institutes. .

INFLATION FORECAST UP

The Eurosystem staff raised its projections for inflation excluding energy and food, in particular for this year and next, “due to earlier unanticipated upward developments and the effects of the vitality of the labor market on the pace of disinflation,” the ECB said in a statement.

The new projections show an estimated underlying inflation rate of 5.1% on average in 2023 (compared to 4.6% previously), before 3.0% in 2024 (compared to 2.5%) and 2.3% in 2025 (2.2%).

“Unless there is a significant change in our base scenario, it is very likely that we will continue to raise rates in July,” said Christine Lagarde. “We are not considering taking a break.”

Many ECB officials have already signaled that they are inclined to raise rates again in July. As for the September meeting, their positions are not yet made.

There is no doubt that the statistics which will be published by then will make it possible to see things more clearly.

SHARP RISING OF THE EURO

Two quarters of economic contraction in Germany pushed the entire bloc of 20 into a mild recession last winter and GDP is expected to see only modest growth this year.

Unemployment has reached a record level and wage growth is accelerating, even if it remains below inflation.

Rising borrowing costs are dampening both household and corporate credit demand and banks’ willingness to lend, but consumption is holding up well in nominal terms.

“Past rate hikes by the Council are strongly transmitted to financing conditions and are gradually having an impact on the whole economy”, underlined Christine Lagarde.

“Are we done? No. We haven’t reached our destination. Do we still have a long way to go? Yes, we still have a long way to go,” she added.

The prospect of forthcoming rate hikes enabled the euro to rise to its highest level in a month against the dollar, at 1.0897 (+0.72%).

On the bond market, the yield on ten-year German government bonds reached 2.548% before stabilizing around 2.45%. European stock indices momentarily widened their losses before returning to their pre-announcement level.

“The surprise comes from the upward revision of the inflation forecast, but they mostly increased the ‘CPI core’ forecast for next year. They are clearly more concerned that inflation will take longer decline,” said Colin Asher, chief economist at Mizuho.

“The forecast was more ‘hawkish’ than expected. The market was already expecting a rise at the end of July and now there will be question marks over the next meeting,” he added.

(with contributions from Marc Jones, Laetitia Volga, editing by Kate Entringer)

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