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ECB slows rate hikes

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

The ECB, Bank of England and Swiss National Bank 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 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 corralled 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.

“We have made progress over the course of the last few months, but we have more ground to cover, and we have longer to go, and we are in for a long game,” ECB President Christine Lagarde said at a news conference.

That means the bank expects to keep raising rates by half a point “for a period of time”, she said. “We judge that interest rates will still have to rise significantly at a steady pace, to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our 2.0 per cent medium-term target.”

Fed Chair Jerome Powell similarly warned there is “a long way to go” to control US inflation. The comments took a bite from the stock market, as investors hoping for a reprieve from sharply higher borrowing costs got a message from central banks on Wednesday and Thursday: Not today.

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 United States and Europe. The slightly improved, or at least less disastrous, outlook for growth in the eurozone is seen as a green light for Lagarde and the ECB to keep their focus firmly on inflation.

Inflation in the 19 countries that use the euro currency eased to 10 per cent in November from 10.6 per cent in October, the first drop since June 2021. ECB officials say it’s too early to say the pace has peaked, with high energy prices threatening a recession in Europe.

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

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 Russia’s war in Ukraine, which pushed up food and energy prices.

The ECB’s benchmark rate for lending to banks stands at 2.0 per cent, and its rate on deposits left overnight by commercial banks is 1.5 per cent.

Between the July and October ECB 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.

– AP

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