June 15 (UPI) — The European Central Bank on Thursday voted to hike interest rates by 25 basis points as it continues its fight against inflation.
The bank’s governing council said the hike reflected its efforts to ensure that inflation returns to its 2% medium-term target in “a timely manner.”
European Central Bank President Christine Lagarde said that while conditions across various segments in the European economy are mixed, inflation is entrenched enough to warrant another rate hike.
“Inflation has been coming down but is projected to remain too high for too long,” Lagarde said in a speech after the announcement.
Gross domestic product in the eurozone contracted by 0.1% during both the fourth quarter of 2022 and the first quarter of 2023, putting the bloc-wide economy into a recession.
Eurozone growth was hit by a large fall in government spending — down by 1.6% — and a lesser decline of 0.3% in consumer spending and while gross fixed capital formation increased by 0.6%, exports were down 0.1%.
The ECB said the outlook for both inflation and growth was uncertain, with downside risks still coming from pressures from what the bank said was “Russia’s unjustified war against Ukraine and an increase in broader geopolitical tensions, which could fragment global trade and thus weigh on the euro area economy.”
Europe was hit hard by the war given its previous dependence on Russian commodities such as crude oil and grains. Lagarde said Thursday that legacy changes in energy costs are still contributing to inflationary pressures in the European economy.
Not counting volatile items such as food and energy, however, the bank found that consumer-level inflation declined from 5.6% year-on-year to April to 5.3% last month, though that’s still above the 2% target rate for the ECB.
Inflation is slowing at a snail’s pace, with ECB staff forecasting the preferred target rate won’t be reached until 2025. Growth returns, however, with an expansion of 0.9% expected for the year and 1.5% for 2024.
Core inflation is running close to levels seen in the U.S. economy, the world’s largest. But without consecutive declines in GDP, the U.S. economy is outperforming Europe’s.
The U.S. Federal Reserve on Wednesday opted to keep its interest rates unchanged at 5% to 5.25% amid data pointing to a “robust” labor market, balanced by inflation that’s about half what it was in June 2022.
“Holding the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy,” the Fed stated.
