European Central Bank slows pace of interest rate hikes

The European Central Bank has slowed its record pace of interest rate hikes only slightly, joining the US Federal Reserve and other central banks around the world in reinforcing an inflation crackdown.

The Bank of England and Swiss National Bank also dialled back to half-point increases from three-quarters on Thursday, as did the Fed a day earlier in a blitz of central bank action this week.

The banks’ global campaign against soaring consumer prices has slowed somewhat as inflation has made small declines from painfully high levels.

But officials are underlining that inflation is not yet under control from decade highs and that more rate hikes are coming to wrestle down price spikes for energy, food and housing that are ravaging people’s finances.

“The Governing Council decided to raise interest rates today, and expects to raise them significantly further, because inflation remains far too high and is projected to stay above the target for too long,” the ECB said of the bank’s 2% goal.

Inflation in the 19 countries that use the euro currency eased to 10% in November from 10.6% in October, the first drop since June 2021.

But ECB officials have said it is too early to say the pace has peaked, with high energy prices threatening a recession in Europe.

Fed Chair Jerome Powell similarly warned there was “a long way to go” to control US inflation, which eased to 7.1% in November from 7.7% a month earlier.

The ECB’s hike follows record increases of three-quarters of a point in July and October. Half-point hikes are still bigger than the usual moves before the recent outburst of inflation, triggered by the rebound from the pandemic and the war in Ukraine pushing up food and energy prices.

Bank president Christine Lagarde is expected to stick to a strong anti-inflation message during a news conference after the decision, with a three-quarter-point rate increase not absolutely ruled out.

Analysts say rate hikes are likely to continue into next year, and Ms Lagarde’s remarks will be watched for hints on how high rates might go.

Interest rate increases are central banks’ chief tool to fight inflation. Higher benchmarks are soon reflected in higher market borrowing costs for consumers looking for mortgages and businesses needing credit to operate or invest in new facilities. More costly credit reduces demand for goods, and, in theory, also reduces price increases.

The flip side is that higher rates can slow economic growth, and that has become a concern in the US and Europe. The slightly improved, or at least less disastrous, outlook for growth in the eurozone is seen as a green light for Ms Lagarde and the ECB to keep their focus firmly on inflation.

Bank officials say getting tough now prevents inflation from becoming chronic and requiring even more painful medicine.

The ECB’s benchmark rate for lending to banks stands at 2%, and its rate on deposits left overnight by commercial banks is 1.5%.

Between the July and October meetings, the bank raised both benchmarks by two percentage points in just three months, the fastest pace since the founding of the shared euro currency in 1999 and covering ground that took 18 months in early rate-raising cycles.