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The European Central Bank has raised interest rates back to their record high, warning consumer prices are still rising too fast while keeping its options open for further increases.
The ECB’s decision on Thursday to raise its benchmark rate by a quarter-percentage point to 3.75 per cent matches a peak last reached in 2001 when it was trying to boost the value of the newly launched euro.
The widely expected move, the ECB’s ninth consecutive rise, came a day after the US Federal Reserve raised rates by the same amount.
German government bonds rose and the euro gave up some of its gains against the dollar after markets interpreted the ECB’s post-meeting statement as dovish.
The euro stood 0.2 per cent higher against the dollar at $1.11 following the ECB’s decision. The currency had earlier strengthened by 0.4 per cent.
In government bond markets, the yield on the interest rate-sensitive two-year German note fell 0.08 percentage points to 3.19 per cent, while the yield on benchmark 10-year Bunds dropped 0.05 percentage points to 2.4 per cent. Yields fall as prices rise.
The big change in the statement was that the ECB gave itself more wriggle room over further rate rises by ditching last month’s commitment that future decisions would ensure interest rates will be brought to levels that were “sufficiently restrictive”.
Instead, the central bank said it would ensure interest rates “will be set at sufficiently restrictive levels for as long as necessary” to bring inflation down to rate-setters’ 2 per cent target. At present, price pressures are almost three times above that level, at 5.5 per cent.
The tweak supports economists’ predictions that major central banks are close to ending their rate rises, with inflation falling faster than expected and growth slowing.
Eurozone inflation has dropped from a peak of 10.6 per cent last year and a further slowdown is expected when July data is published on Monday.
The ECB repeated its warning that inflation was still expected to remain “too high for too long” and committed to follow a “data-dependent approach” to future rate decisions.
But it also changed its description of inflation to indicate it was more confident price pressures were on a downward path.
Last month it said there were only “tentative signs of softening” in price pressures, but on Thursday it said “while some measures show signs of easing, underlying inflation remains high overall”.
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