ECB Raises Benchmark Deposit Rate to Record High, but Hints at Possible Peak Amid Falling Inflation in Eurozone and US
The European Central Bank (ECB) raised its benchmark deposit rate by a quarter-percentage point to 3.75 percent, reaching a record high last seen in 2001 when the euro was launched. This move was widely expected and marked the ninth consecutive rate hike by the ECB. However, the central bank hinted that this might be the peak of the interest rate increases, with inflation falling faster than anticipated in the Eurozone and the US.
The ECB had previously stated its intention to bring interest rates to “sufficiently restrictive” levels to achieve its 2 percent inflation target. However, the bank altered its language and now says it will keep interest rates at “sufficiently restrictive levels for as long as necessary.”
ECB President Christine Lagarde acknowledged the change in wording, stating that future rate decisions would depend on upcoming economic data, leaving open the possibility of further rate hikes or a pause. Eurozone inflation has decreased from its peak last year, and it is expected to slow down further with the release of July data.
The ECB reiterated its warning that inflation would remain “too high for too long” and committed to a “data-dependent approach” for future rate decisions. While some measures indicate a softening in price pressures, the central bank still believes that underlying inflation remains high overall.
To reduce the interest it pays to banks, the ECB will lower the rate it pays on reserves required to be held by lenders at central banks in the region. This move aims to improve the transmission of policy rates to money markets but may reduce banks’ incentive to pass on ECB rates to depositors, according to some economists.A graph of growth in the year 2020