The European Central Bank raised interest rates half a percentage point on Thursday, moderating its pace from recent meetings, but warned that rates would still need to climb “significantly” next year as the bank said inflation would be more stubborn than initially expected.
Policymakers are trying to calibrate the right amount of braking needed to bring down record-high inflation even as the region’s economy slows.
The annual rate of inflation in the eurozone slowed last month to 10 percent, the first deceleration in more than a year. Although it is an encouraging sign for central bankers, especially as it was accompanied by lower inflation rates in the United States and Britain, policymakers are not rushing to end their battle against high inflation. Staff at the E.C.B. said inflation would average higher than previously expected this year and next and would still be above the bank’s 2 percent target in 2025.
“The Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictiveto ensure a timely return of inflation to the 2 percent medium-term target,” the bank said in a statement on Thursday.
The decision follows a similar move by the Federal Reserve, which raised rates by half a point on Wednesday, and the Bank of England, which did the same on Thursday. All three central banks reduced the size of their rate increases from three-quarters of a percentage point at previous meetings.
Across the 19 countries that use the euro, prices are increasing at vastly different speeds. The annual rate of inflation last month slowed to 6.6 percent in Spain but in Estonia, Latvia and Lithuania, the rate remained above 21 percent.
And even if price increases are starting to slow, the outlook for inflation is uncertain and, in Europe, heavily influenced by volatile energy prices. Policymakers are alert to signs that this period of high inflation is becoming embedded in the economy, especially through higher wage demands. They are also wary of expensive and untargeted government policies to insulate households from high energy prices, because this largess risks increasing economic demand, causing inflation to persist.
“Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations,” the bank said on Thursday.
From its July meeting through its one in October, the E.C.B. already raised interest rates by 2 percentage points, the fastest pace of tightening in the central bank’s two-decade history.
On Thursday, the central bank went further and increased its deposit rate, which is what banks receive for depositing money with the central bank overnight, from 1.5 percent to 2 percent, the highest since January 2009.
Christine Lagarde, the president of the central bank, had previously warned that a slowdown in economic growth, including a shallow recession, wouldn’t be enough to meaningfully slow inflation on its own and central bank action would still be needed.