ECB joins Fed in easing pace of rate hikes

The European Central Bank slowed its record pace of interest rate hikes only slightly Thursday, joining the U.S. Federal Reserve and other central banks around the world in reinforcing an inflation crackdown while glimpsing headway against the high prices that are plaguing consumers.

The Bank of England and Swiss National Bank also dialed back to half-point increases from three-quarters Thursday, as did the Fed a day earlier in a blitz of central bank action this week.

The banks’ global campaign against soaring consumer prices has slowed somewhat as inflation has made small declines from painfully high levels. But officials are underlining that inflation is not yet corralled from decade highs and that more rate hikes are coming to wrestle down price spikes for energy, food and housing that are ravaging people’s finances.

“The Governing Council decided to raise interest rates today, and expects to raise them significantly further, because inflation remains far too high and is projected to stay above the (2%) target for too long,” the ECB said.

Inflation in the 19 countries that use the euro currency eased to 10% in November from 10.6% in October, the first drop since June 2021. But ECB officials have said it’s too early to say the pace has peaked, with high energy prices threatening a recession in Europe.

It could “short-lived and shallow,” with economic output shrinking at the end of this year and the first three months of 2023, the bank said. Two straight quarters of contraction is one definition of a recession, although the economists on the eurozone business cycle dating committee use a broader range of data such as unemployment and the depth of the downturn.

Fed Chair Jerome Powell also has warned there is “a long way to go” to control U.S. inflation, which eased to 7.1% in November from 7.7% a month earlier. It took a bite from the stock market as investors hoping for a reprieve from sharply higher borrowing costs got a message from central banks Wednesday and Thursday: Not today.

The ECB’s hike follows record increases of three-quarters of a point in July and October. Half-point hikes are still bigger than the usual moves before the recent outburst of inflation, triggered by the rebound from the pandemic and Russia’s war in Ukraine — pushing up food and energy prices.

Bank President Christine Lagarde is expected to stick to a strong anti-inflation message during a news conference. Her remarks will be watched for hints on how high rates might go.

Analysts at Pictet Wealth Management said the prospects for inflation remaining above target for some time mean that Lagarde “at a minimum … should lean against the idea of a pause any time soon.”

One reason for sticking to the tough anti-inflation message: the growth outlook for the European economy has improved, to mere shallow recession from possible disaster.

Despite energy prices surging after Russia cut off most natural gas shipments, the European Union succeeded in largely filling underground storage for the winter heating season. That has eased concern about running low on gas, which is used for heating, industry and power generation, and reduced fears of rolling electricity blackouts and industrial shutoffs.

Interest rate increases are central banks’ chief tool to fight inflation. Higher benchmarks are soon reflected in higher market borrowing costs for consumers looking for mortgages and businesses needing credit to operate or invest in new facilities. More costly credit reduces demand for goods, and, in theory, also reduces price increases.

The flip side is that higher rates can slow economic growth, and that has become a concern in the U.S. and Europe. The slightly improved, or at least less disastrous, outlook for growth in the eurozone is seen as a green light for Lagarde and the ECB to keep their focus firmly on inflation.

Bank officials say getting tough now prevents inflation from becoming chronic and requiring even more painful medicine.

The ECB’s benchmark rate for lending to banks stands at 2%, and its rate on deposits left overnight by commercial banks is 1.5%.

Between the July and October meetings, the bank raised both benchmarks by two percentage points in just three months, the fastest pace since the founding of the shared euro currency in 1999 and covering ground that took 18 months in early rate-raising cycles.