PARIS (Reuters) – The European Central Bank (ECB) raised interest rates for the tenth time in a row on Thursday in the face of persistent inflationary pressures, but signaled that this cycle of monetary tightening, the most aggressive since the creation of the institution, was probably coming to an end.

The ECB chose to raise its rates by a quarter of a point, bringing its deposit rate to 4%, its highest level since the creation of the euro in 1999.

Market observers were divided between a pause or a new quarter-point increase at the end of Thursday’s meeting, but the prospect of inflation sustainably above the ECB’s 2% target won over the members of the Board of Governors.

In its latest economic projections published Thursday, the central bank raised its inflation forecasts for 2023 and 2024 while downgrading its economic growth projections for the euro zone, particularly for next year.

Inflation should not return to the ECB’s 2% target before the very end of 2025, said the president of the central bank, Christine Lagarde, during a press conference.

This latest increase brings to a total of 450 basis points the increase in rates in the euro zone for more than a year, an unprecedented tightening in the history of the single currency justified by the fight against soaring prices.

The ECB believes, however, that this cycle of rate increases is now probably coming to an end.

“Based on its current assessment, the Governing Council considers that the ECB’s key interest rates have reached levels which, if maintained for a sufficiently long period, will contribute significantly to the return of inflation to the level as soon as possible. of the objective”, declared the institution in its press release.

“Future decisions by the Governing Council will ensure that the ECB’s key interest rates are set at sufficiently restrictive levels, for as long as necessary,” it added.

DURATION RATHER THAN LEVEL

These two paragraphs of the press release were read several times by Christine Lagarde during her press conference, when she was questioned about the end of the cycle of monetary tightening.

The president did not absolutely rule out a further rate hike, saying that attention was now focused on the duration of maintaining high rates rather than their level.

“The focus going forward is going to be on duration, but that doesn’t mean – because we can’t say it now – that we’ve reached the peak,” she said.

Christine Lagarde acknowledged that some members of the Governing Council would have preferred a pause on rates but added that the decision to raise them again had been taken with a “solid majority”.

Market operators saw the ECB’s announcements as a clear signal of the end of the monetary tightening cycle.

“Of course, the ECB has kept its options open, with a renewed emphasis on its ‘data-dependent approach’ to deciding the scale and duration of monetary restraint needed to bring inflation back to normal. objective of 2%”, observes Holger Schmieding, economist at Berenberg.

“The fact remains that, by central bank standards, the signal that the ECB does not plan to raise rates further is quite clear.”

FALL OF THE EURO

In financial markets, this translated into a weakening of the euro and bond yields in the region.

At 2:12 p.m. GMT, the single currency fell 0.63% to $1.0660, the lowest in three months. The ten-year German Bund rate, the benchmark for the euro zone, fell by almost four basis points, to 2.616%.

The European stock markets, for their part, increased their gains after the ECB’s announcements. The pan-European Stoxx 600 index rose 1.13%.

“Our reading is that the ECB is finished with raising its rates but that we do not expect a reduction anytime soon. We think that the rate reductions will take place in the second half of 2024,” estimated Mohit Kumar, economist at Jefferies in London.

Investors will follow next week the monetary policy decision of the Federal Reserve (Fed) which should, according to their expectations, opt for the status quo. The American central bank began its monetary tightening cycle earlier than the ECB.

The Bank of England will also decide on its interest rates next Thursday. A further rise in rates is expected but investors have lowered this probability following the ECB’s announcements.

(Written by Blandine Hénault, with Francesco Canepa and Balazs Koranyi in Frankfurt, David Milliken in London, edited by Jean-Stéphane Brosse)

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