The European Central Bank raised its deposit rate to a historic high on Thursday and kept its options open on whether more increases will be needed to bring down inflation against a worsening economic backdrop.
Thursday’s hike, the ninth in a row, increases the rate that the ECB pays on banks’ deposits from 3.50 per cent to 3.75 per cent, its highest level since 2000, before euro banknotes and coins had even been put into circulation.
But the ECB removed a clear hint at further hikes from its policy statement, meaning a fresh increase at the ECB’s next meeting in September should not be taken for granted.
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“The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels,” the ECB said.
In its June statement, the ECB had said rates would “be brought” to sufficiently restrictive levels, implying more rises.
Inflation in the euro zone has halved since last October but, at 5.5 per cent, it remains well above the ECB’s 2 per cent target.
On the other hand credit creation, demand for loans and economic activity have all slowed sharply, showing the ECB’s steady diet of rate hikes is already taking a toll on the economy.
“The developments since the last meeting support the expectation that inflation will drop further over the remainder of the year but will stay above target for an extended period,” the ECB said.
The ECB has now increased borrowing costs by a combined 4.25 percentage points in a year, its fastest pace on record. But a peak is now clearly in sight and the debate is set to shift to how long rates will need to be kept at current levels.
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With Thursday’s decision the rate that banks pay to borrow at the ECB’s weekly auctions was also increased to 4.25% from 4.0% while daily loans will now cost 4.50 per cent, from 4.25 per cent previously.
Both facilities have been little used as the banking system is still awash with cash from a decade of monetary stimulus by the ECB.
Web Title – ECB raises key rate to historic high, keeps options open for September