FRANKFURT – The European Central Bank raised interest rates by 0.5 percentage points and Said It intends to raise rates by the same magnitude in March to moderate rising inflation.
The hike was widely expected and would take the key deposit rate to 2.5 per cent after the ECB raised rates at a record pace from its all-time low of -0.5 per cent in July.
But there were doubts whether the governing council would pre-commit to another big hike next month after headline inflation fell faster than expected and dovish policymakers called for more incremental steps.
The ECB’s announcement comes on the heels of a similar move by the Bank of England on Thursday. Late Wednesday, the US Federal Reserve hiked rates by a quarter-percentage-point after a year of large increases, but signaled an “ongoing rise” in borrowing costs.
While the ECB said rates needed to rise “significantly at a sustained pace”, it also said the subsequent policy path would be decided after its March policy decision. By then policy makers will have the new ECB staff forecasts for growth and inflation.
Prior to Thursday’s announcement, financial markets had expected the ECB deposit rate to peak at 3.5 per cent by the summer.
The ECB appears to be trying to play down speculation that any peak will be short-lived and that rates may soon come down, noting that “keeping interest rates at restrictive levels will reduce inflation over time”. “
The statement also confirmed the ECB’s plan to reduce the size of bonds by an average of €5 trillion from the beginning of March 2023 to the end of the second quarter of €15 billion. The pace of reduction thereafter is yet to be determined.