The European Central Bank raised interest rates to the highest level in more than two decades on Thursday, as policymakers continued their campaign to stamp out inflation they said was forecast to remain too high for too long.
The bank, which sets rates for the 20 countries that use the euro currency, lifted rates by a quarter of a percentage point, putting the deposit rate at 3.5 percent, the highest since 2001. It was the bank’s eighth consecutive increase. The move has been well telegraphed since the Governing Council’s last meeting in early May, when policymakers expressed concern about underlying inflation pressures from wage growth and corporate profits or the impact of rising food prices.
“Inflation has been coming down but is projected to remain too high for too long,” Christine Lagarde, the president of the bank, told reporters on Thursday.
The decision comes a day after the Federal Reserve held interest rates steady for the first time in more than a year. After last month’s mirror image move, when both raised rates a quarter-point, the two central banks have begun to diverge again, in part because the European Central Bank hasn’t been raising interest rates for as long or as high as the Fed.
Policymakers say they want to avoid the risk of declaring victory in their fight against rising prices prematurely, even as the eurozone’s annual rate of inflation has dropped from its double-digit peak late last year to 6.1 percent in May, the slowest pace in more than a year. Much of the slowdown can be attributed to lower wholesale energy costs, but central bankers have been alert to signs that inflation is becoming embedded in the economy, which could impede them from getting inflation back to the 2 percent target.
The central bank forecasts inflation to average 5.4 percent this year but still be above target in two years’ time, at 2.2. percent, slightly higher than the previous projections set out three months ago.
But as inflation slows, the question of how much policy tightening is the right amount has become difficult to gauge. Too much could restrain the economy more than necessary and cause or worsen a recession. Too little could allow inflation to become a persistent problem that policymakers can’t root out. It’s a challenge facing central bankers around the globe.
On Wednesday, the Fed didn’t raise interest rates and said they were giving themselves time to assess how the economy is reacting to the rapid pace of past rate increases. But policymakers warned they might need to raise rates again later. Such a pattern has been recently established in Australia and Canada, where central banks held rates steady for a short period before resuming rate increases.
In May, the European Central Bank slowed down the pace of its rate increases as it acknowledged the impact that tighter monetary policy was having on the region’s economy through more restrictive lending conditions at banks. On Thursday, the bank said tighter financing conditions are expected to increasingly dampen demand.
As the central bank signaled higher interest rates it also slightly lowered its forecasts for economic growth this year and next, predicting that the economy would grow 0.9 percent this year and 1.5 percent year. The eurozone slipped into recession earlier this year as high prices caused people to pull back on spending.
“The Governing Council’s future decisions will ensure that the key E.C.B. interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2 percent medium-term target,” the bank said in its statement, “and will be kept at those levels for as long as necessary.”
Eshe Nelson is a reporter in London, where she writes about companies, the British economy and finance. @eshelouise
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