ECB raises interest rates back to highest-ever level

Receive free Eurozone interest rates updates

We’ll send you a myFT Daily Digest email rounding up the latest Eurozone interest rates news every morning.

The European Central Bank has raised interest rates back to their record high, but signalled that eurozone borrowing costs may have peaked.

The ECB’s decision on Thursday to raise its benchmark rate by a quarter-percentage point to 3.75 per cent matches a high last reached in 2001, when it was trying to boost the value of the newly launched euro.

Thursday’s widely expected move, the ECB’s ninth consecutive rate rise, came a day after the US Federal Reserve raised rates by the same amount.

Yet despite Fed chair Jay Powell’s insistence on Wednesday that there could be more tightening ahead, investors are increasingly betting these increases will be the central banks’ last, as inflation falls faster than expected on both sides of the Atlantic.

“We reiterate our call that in the base case, the ECB — like the Fed — is done raising rates, though there is certainly still a material risk of a further hike,” said Krishna Guha of Evercore ISI.

The euro dropped 0.5 per cent to $1.103 following the ECB’s decision, as the central bank indicated it may be ready to bring its tightening campaign to an end.

The US currency was bolstered by a stronger-than-expected figure for US gross domestic product on Thursday showing the world’s largest economy expanded by an annualised rate of 2.4 per cent in the second quarter.

In eurozone government bond markets, the yield on the interest rate-sensitive two-year German note declined 0.08 percentage points to 3.19 per cent, while the yield on benchmark 10-year Bunds dropped 0.05 percentage points to 2.4 per cent. Yields fall as prices rise. 

Last month the ECB said in its policy statement it would ensure interest rates were brought to levels that were “sufficiently restrictive” to bring inflation down to rate-setters’ 2 per cent target.

However, on Thursday the central bank altered this language, saying instead it would ensure interest rates “will be set at sufficiently restrictive levels for as long as necessary”. Price pressures currently stand at 5.5 per cent, almost three times that level.

ECB president Christine Lagarde acknowledged the new wording on Thursday, saying it was not “irrelevant” and that policymakers had “an open mind as to what the decisions will be in September and subsequent meetings”.

“There is a possibility of a hike, there is a possibility of a pause,” she added, saying the vote would depend on forthcoming economic data.

Eurozone inflation has dropped from a peak of 10.6 per cent last year and a further slowdown is expected when July data is published on Monday.

The ECB repeated its warning that inflation was still expected to remain “too high for too long” and committed to follow a “data-dependent approach” to future rate decisions.

But it also changed its description of inflation to indicate it was more confident price pressures were on a downward path. 

Last month it said there were only “tentative signs of softening” in price pressures. On Thursday it said “while some measures show signs of easing, underlying inflation remains high overall”.

To cut the amount of interest it pays to banks, the ECB said it would reduce the rate it pays on the reserves lenders are required to hold at central banks in the region.

Rate-setters said this would improve the transmission of its policy rates to money markets. But Carsten Brzeski, an economist at Dutch bank ING, said it risked “reducing the appetite to pass on ECB rates to depositors”.