ECB slows rate hikes; BOE raises key rate to 14-year high as central banks continue inflation fight

FRANKFURT/LONDON - The European Central Bank raised interest rates for the fourth time in a row on Thursday – although by less than at its last two meetings – pledged further hikes and laid out plans to drain cash from the financial system as part of its fight against runaway inflation.

Meanwhile, the Bank of England (BOE) raised interest rates for the ninth time in a row to a 14-year high of 3.5 per cent.

The ECB

has been raising rates at an unprecedented pace

to rein in prices that have soared since economies reopened after the Covid-19 pandemic, driven by supply bottlenecks and then surging energy costs following Russia’s invasion of Ukraine.

The central bank for the 19-country euro zone raised the interest rate it pays on bank deposits from 1.5 per cent to 2 per cent on Thursday, moving further away from a decade of ultra-easy policy after being wrong-footed by the sudden rise in prices.

But the decision marked a slowdown in the pace of tightening from 75-basis-point hikes at each of the ECB’s two previous meetings, as inflation shows signs of peaking and a recession looms.

Like the BOE and the the US Federal Reserve, the ECB flagged even higher borrowing costs ahead to persuade investors it is still serious about fighting inflation, which could stay above its 2 per cent target until 2025.

“The Governing Council judges 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 the 2 per cent medium-term target,” it said.

The ECB also laid out plans to stop replacing maturing bonds from its €5 trillion (S$7.2 trillion) portfolio, reversing years of asset purchases that have turned the central bank into the biggest creditor of many euro zone governments. Under the plan, it will reduce monthly reinvestments from its Asset Purchase Programme by €15 billion starting in March and revise the pace of balance-sheet reduction from July.

The move, which mops up liquidity from the financial system, is designed to let long-term borrowing costs rise and follows a similar step by the Fed earlier this year.

The BOE decision, in the meantime, takes rates in Britain to their highest level since November 2008. This comes as the country is dealing with the highest level of inflation in four decades and amid signs that it is becoming embedded in wage-setting.

But official figures this week suggested inflation in Britain is now past its peak.

The rate of inflation slowed from 11.1 per cent in October

to 10.7 per cent in November

and labour market participation improved, with 76,000 inactive people rejoining the workforce and vacancies falling. However, wages are rising at the fastest pace in two decades outside the pandemic and inflation remains more than five times the BOE’s 2 per cent target.

In a statement from the Treasury after the decision, Chancellor of the Exchequer Jeremy Hunt acknowledged that higher rates will be difficult for many households.

“I know this is tough for people right now, but it is vital that we stick to our plan, working in lockstep with the BOE as they take action to return inflation to target,” he said in a statement.

“The sooner we grip inflation the better. Any action which risks permanently embedding high prices into our economy will only prolong the pain for everyone, stunting any prospect of economic recovery.”

Officials at the BOE estimate that Britain is now in recession, though the economy is slightly stronger than it was anticipated in November.

Gross domestic product in the fourth quarter probably will fall 0.1 per cent following a decline of 0.5 per cent in the third quarter, the BOE said.

The government’s fiscal package released last month will support the economy next year but depress output in three years, it added.

REUTERS, BLOOMBERG