Posted by 
FRANKFURT — The European Central Bank raised its key deposit rate to an all-time high, but signaled that it thinks it has done enough to end the worst bout of inflation in four decades.
“Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” the ECB said in a statement.
The move showed that, in the near term at least, the bank is still more concerned about inflation staying above target than about risking a recession.
“The ECB didn’t blink in the face of growing speculation that it would hit pause on the rate-hiking cycle,” said UBS economist Dean Turner after the announcement. “We expect this to be the last hike from the ECB in this cycle, but that does not mean the era of tight monetary policy is over. Interest rates are likely to remain at these levels well into next year. Moreover, the ECB will continue to, and may even accelerate, the shrinking of its balance sheet.”
The ECB’s action was its 10th straight hike in 15 months. It justified the move by saying: “Inflation continues to decline but is still expected to remain too high for too long.”
Financial markets were more concerned about the prospect of an end to the current cycle of tighter policy. The euro fell over half a percent to a four-month low of $1.0655, while yields on benchmark government bonds around the region fell sharply.
The ECB based its decisions on updated economic forecasts, which see inflation still topping the ECB’s 2 percent target over the next two years. Prior to the announcement, it had said that it will lift rates again should there be “no convincing evidence” that inflation is on a quick and reliable path to target.
An upward revision to next year’s inflation forecasts to 3.2 percent from 3 percent previously and a minor trimming of the 2025 forecast to 2.1 percent from 2.2 percent clearly were not seen as providing that evidence.
Governing council members have fretted that, the longer inflation stays above its target now, the more likely it is that people and companies will seek compensation through higher wages and prices in future.
For now, however, ECB staff have slightly revised down the projected path for inflation excluding energy and food, to an average of 5.1 percent in 2023, 2.9 percent in 2024 and 2.2 percent in 2025.
It said this was due in large part to its previous rate hikes, whose effects it said “continue to be transmitted forcefully.”
“Financing conditions have tightened further and are increasingly dampening demand, which is an important factor in bringing inflation back to target,” it added.
However, President Christine Lagarde acknowledged in the opening remarks at her press conference that even stronger parts of the economy are starting to falter as a result.
The ECB said it had made “a significant downward revision” to its growth forecasts. It now sees the eurozone economy growing only 0.7 percent this year, down from 0.9 percent in its June forecast. It also cut its forecast for 2024 to 1.0 percent from 1.5 percent, and for 2025 to 1.5 percent from 1.6 percent.
The ECB’s past rate hikes have already started ringing alarm bells in several European capitals, with both the Italian and Spanish governments speaking out over the summer against further hikes. In its statement, however, the ECB did not entirely rule out further tightening and instead stressed that it remains ‘data-dependent’.
Deutsche Bank economist Mark Wall argued that chances of further hikes remain real. “A lingering pause is being signalled, but it’s a low conviction pause,” he said in a note to clients. “The ECB has retained the option to hike further if necessary. There is no declaration of victory on inflation.”
