The European Central Bank raised interest rates again today, with markets divided on whether it will be the last hike.
It was the ninth consecutive rate increase for the central bank for the Eurozone as it attempts to bring inflation back under control.
The ECB said: “Inflation continues to decline but is still expected to remain too high for too long.
“The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It therefore today decided to raise the three key ECB interest rates by 25 basis points.
“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. While some measures show signs of easing, underlying inflation remains high overall. The past rate increases continue to be transmitted forcefully: financing conditions have tightened again and are increasingly dampening demand, which is an important factor in bringing inflation back to target.”
lémence Dachicourt, senior portfolio manager at Morningstar Investment Management, said: “The ECB’s latest 0.25% increase in interest rates comes as no surprise. However, recent activity surveys suggest the economic slowdown is now affecting both manufacturing and services within the Eurozone.
“This points towards the ECB nearing the end of its rate hiking cycle, but the persistency in core inflation also tells us rate cuts are not on the agenda for now.”
While inflation is already around the 2% target rate in some countries using the Euro, such as Spain and Greece, it is well above target in Eastern European countries using the currency like Slovakia and Estonia.
That has made it difficult for markets to figure out what the Bank’s next move could be amid fears that too many rises could push the union from the shalllowest recession possible into a deeper decline, but too few could cause inflation to become entrenched.
Traders see a roughly three-in-five chance that the ECB hikes rates again this year, but their bets suggest it could pause rates before raising them again, as the US Federal Reserve did.
Markets will hope for more clarity as Christine Lagarde expalins the bank’s decisions later this afternoon.
The Fed raised its own rates by a quarter of a percentage point yesterday, and markets are more confident that this will be the US central bank’s final rate rise.
In contrast, the Bank of England is still expected to have a few rate hikes left. Markets expect interest rates in the UK to rise by another full percentage point before peaking at 6%. Inflation in the UK remains higher than in the Eurozone or US, despite a bigger-than-expected fall last month.
