The European Central Bank raised interest rates to a record high but also signaled that eurozone borrowing cost may have reached a peak.
The ECB raised its benchmark deposit rate on Thursday by a quarter percentage point, to 3.75 percent. This is the same as the high reached in 2001 when the ECB was trying to increase the value of newly introduced euro.
The ECB raised rates for the ninth time in a row on Thursday, a move that was widely anticipated.
Investors are betting that despite the Fed’s Jay Powell insistence on Wednesday, these tightening measures will be the last of the central banks, as inflation is falling faster than expected both on the Atlantic and on the American side.
“We reiterate that the ECB, like the Fed, is done raising interest rates in the base-case, although there is still a risk of a future hike,” said Krishna Guha, Evercore ISI.
Following the ECB decision, the euro fell 0.8 percent to $1.099 as the central banks indicated that it might be ready to end its tightening campaigns.
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.
On the eurozone government bond markets, the yield of the two-year German bond, which is sensitive to interest rates, fell 0.05 percentage points, to 3.22 percent, while the 10-year German bond yield remained unchanged at 2.47 percent. As prices increase, yields decrease.
In its last policy statement, the ECB stated that it would make sure interest rates are brought down to “sufficiently restrictive levels” in order to bring inflation to the rate-setters’ 2 per cent target.
On Thursday, the central bank changed this language and said that it would “ensure interest rates will be set at sufficient restrictive levels for as much time as necessary”. The price pressures are now at 5,5%, which is almost three times higher.
Christine Lagarde, the ECB’s president, acknowledged the new language on Thursday. She said it wasn’t “irrelevant”, and that policymakers were “open-minded” about what decisions would be made in September and at subsequent meetings.
She added that the vote will depend on forthcoming data. Eurozone Inflation is down from its peak of 10.6 percent last year. A further drop is expected in July’s data, which will be released on Monday.
The ECB reiterated its warning that the inflation rate was expected to stay “too high” for “too long”. It also committed to a “data dependent approach” in future rate decisions.
It also changed the way it described inflation, indicating that it is more confident about price pressures on a downward trajectory.
Last month, it stated that there were “tentative signs” of a softening in the price pressures. It said on Thursday that “while certain measures show signs of easing but underlying inflation is still high”.
The ECB announced that it would lower the interest rate it pays banks on the reserves they are required to keep at the central banks of the region.
The rate-setters claimed that this would improve its transmission of policy rates to the money markets. Carsten Brzeski of Dutch bank ING said that it could “reduce the appetite to pass ECB rates on to depositors”.