ECB Hikes Rates Again As Lagarde Leaves Door Open For Pause Ahead

(RTTNews) - The European Central Bank raised its interest rates on Thursday, as expected, for the ninth policy session in a row citing the prospect of inflation in the euro area staying too high for too long, while the bank chief Christine Lagarde signaled that policymakers are having an open mind regarding future rate decisions, suggesting that a pause may be on the horizon. The Governing Council, led by ECB President Lagarde, increased the main refinancing rate, or refi, by 25 basis points at 4.25 percent. The deposit facility rate was raised to 3.75 percent, which is the highest level in 22 years, and the lending rate was lifted to 4.50 percent.

"We are deliberately data dependent, we have an open mind as to the decisions in September and in subsequent meetings," Lagarde said during the post-decision press conference.

The previous change in the interest rates was a similar hike in June. The ECB has raised rates by a cumulative 375 basis points with hikes in every policy session of the current tightening cycle that began in July last year. "Inflation continues to decline but is still expected to remain too high for too long," the ECB said in a statement. Underlying inflation remains high overall, the bank added.

The ECB pointed out that the past rate increases continue to be transmitted forcefully, and that financing conditions have tightened again and are increasingly dampening demand, which is crucial for bringing inflation back to target.

The Governing Council also decided to set the remuneration of minimum reserves at 0 percent.

"...future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2 percent medium-term target," the ECB said.

Policymakers will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction, the bank added.

Lagarde did not reiterate that the bank had "more ground to cover" in its battle against inflation, unlike in the past few meetings where such wording was given emphasis. Such omissions in communication, a recent run of weak economic data for the Eurozone economy, and a rate-hike pause by other leading central banks like the US Federal Reserve have given rise to speculation that the ECB is headed for a halt in its tightening cycle in September. ING economist Carsten Brzeski said the ECB is again running the risk of being behind the curve. But this time the bank is not doing so by being too benign on inflation but rather by being too optimistic and too benign on the economic impact of its own policy measures, the economist added.

"We think that the ECB is not yet done with hiking rates but a pause has become fashionable amongst central banks, which had been ahead of the ECB in their hiking cycles," Brzeski said.

"In fact, the ECB's own growth and inflation projection in September will have to see a significant downward revision in order to stop the central bank from hiking rates at least once more after today."