ECB Hikes for First Time Since 2023 as Inflation Heats Up

3k)bgy8f7w{5ppff073]b0w}_media_dl_1.png Bloomberg

Article content

(Bloomberg) — The European Central Bank raised interest rates for the first time in almost three years, concluding it can no longer wait out the Iran war as inflation pressures intensify.

Article content

The deposit rate was lifted to 2.25% from 2%, as anticipated by economists and investors who foresee another quarter-point move in September. The ECB reiterated it won’t pre-commit but said it remains well positioned to navigate the current unpredictability. 

Article content

Article content

Article content

“The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth,” it said in a statement. “The full implications of the war for medium-term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second-round effects.”

Article content

Article content

European bonds held gains after the announcement, with the 10-year yield three basis points lower at 3.05%. The euro was steady against the dollar at $1.1538.

Article content

Thursday’s hike is the first policy reaction by a major central bank to the jump in oil prices triggered by the Middle East conflict. With the fighting now in its fourth month, officials in the euro area worry that inflation is broadening beyond energy and won’t simply be tamed by a US-Iran peace deal, even if one materializes soon.

Article content

Those fears are reflected in fresh quarterly projections showing consumer prices advancing more quickly this year than previously envisaged, before easing back to the 2% target in 2028. But underscoring the bind for the ECB, the new outlook also points to dwindling economic growth as inflation and higher borrowing costs sap buying power.

Article content

Article content

“The war in the Middle East is weighing on activity, and surveys are pointing to a slowdown, especially in services,” President Christine Lagarde told reporters in Frankfurt. “The increase in energy prices will lift inflation further over the summer and keep it well above target into the first half of 2027.”

Article content

Article content

The ECB came close to acting in April and even some of its most dovish policymakers suggested in the run-up to this week’s meeting that there’s now no real alternative.

Article content

They still have vivid memories of 2022, when Russia’s attack on Ukraine ignited a record bout of inflation and the ECB was accused of dragging its feet in responding. During that episode, the deposit rate eventually reached 4% before being cut from mid-2024.

Article content

This time around officials have an even closer eye on inflation expectations, which have risen substantially. Some fear worse is to come due to the damage inflicted on energy infrastructure in the Gulf as well as friction within global supply chains.

Article content

Other Group of Seven nations are less eager to step in. The Bank of Canada kept borrowing costs unchanged on Wednesday. Next week, the Federal Reserve and the Bank of England are also likely to stand pat, while the Bank of Japan is expected to continue a gradual tightening cycle that started last year.

Article content

—With assistance from Patrick Donahue, Simon Lee, Mark Evans, Alice Gledhill, Daniel Hornak, Harumi Ichikura, Joel Rinneby, Nick Heubeck, Jenny Leonard, William Horobin, Alessandra Migliaccio, Bastian Benrath-Wright, Jan Bratanic and Richard Bravo.

Article content

(Updates with Lagarde in seventh paragraph.)

Article content