The European Central Bank has slowed the pace of its interest rate increases in line with policymakers in the US and UK, raising borrowing costs by half a percentage point on Thursday and warning of further rate rises to come.
The ECB met the expectations of most economists by raising its deposit rate from 1.5 per cent to 2 per cent, its highest level since the global financial crisis in 2008. In its previous two rate-setting meetings, the central bank raised borrowing costs by 0.75 percentage points each time.
“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,” the ECB said. “Inflation remains far too high.”
The yield on the 10-year German government bond rose 0.1 percentage points to 2.031 per cent while the yield on the 10-year Italian bond added 0.22 percentage points to 4.08 per cent. Yields rise when bond prices fall.
The decision comes after the US Federal Reserve, the Bank of England and the Swiss National Bank all raised rates by half a point this week, down from previous 0.75-point moves.
By lifting rates in smaller increments, central banks on both sides of the Atlantic are responding to signs that inflation has peaked in many countries. The US and European economies appear increasingly likely to slide into recession in the coming months.
Eurozone inflation fell from a record high of 10.6 per cent in October to 10 per cent in November, bolstering investors’ hopes that price growth will decelerate towards the ECB’s 2 per cent target and allow its policymakers to stop raising rates early next year.
