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European Central Bank raises interest rates to highest level since 2000

European Central Bank president Christine Lagarde delivers a speech during a ceremony to celebrate the 25th anniversary of the European Central Bank, in Frankfurt, Germany,.
European Central Bank president Christine Lagarde delivers a speech during a ceremony to celebrate the 25th anniversary of the European Central Bank, in Frankfurt, Germany,. Copyright Kai Pfaffenbach/Pool via AP
Copyright Kai Pfaffenbach/Pool via AP
By Euronews with AP
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Christine Lagarde warned that consumer prices are still rising too fast.

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The European Central Bank (ECB) hiked interest rates for the ninth consecutive time on Thursday, bringing rates to their highest level in 23 years.

But ECB President Christine Lagarde said that the bank's governing council still had "an open mind as to what the decisions will be in September and in subsequent meetings".

"This determination based on data might vary from one month to the other so we might hike and we might hold and what is decided in September is not definitive," she said at a press conference.

Central banks around the world have been raising borrowing costs to combat inflation unleashed by higher energy prices after Russia invaded Ukraine and supply chain backups as the global economy recovered from the COVID-19 pandemic.

Now, the question is whether the rapid rate hikes are reaching their end.

The ECB move followed a decision by the US Federal Reserve on Wednesday to raise its key rate for the 11th time in 17 months. Fed Chair Jerome Powell was noncommittal about whether more rate increases might be coming, though inflation is lower in the US - at three per cent - than it is in Europe.

Inflation in the eurozone has fallen from its peak of 10.6 per cent in October to 5.5 per cent in June, still well above the bank’s target of two per cent considered best for the economy.

Households and businesses are facing a double hit from price spikes and higher rates, which make it more expensive for people to get loans to buy homes and cars or for companies to get new equipment or build facilities.

Rates are working their way through the economy, weighing on home prices and construction activity, and are designed to work so people spend less and prices come down. But they can also weigh on economic growth, and the eurozone already has seen back-to-back quarters of contraction.

"I think the good news for European compatriots is that inflation is declining," said Lagarde.

"You know we had a reading of 10.6% in October, we are now at 5.5%. But is that enough, is that good as a result? Not quite. We have a target which is medium term 2%, sustainable, and we want to get there."

Michael Probst/Copyright 2023 The AP. All rights reserved
The sun sets next to the European Central Bank in Frankfurt, Germany, Monday, July 24, 2023.Michael Probst/Copyright 2023 The AP. All rights reserved

With Thursday’s quarter-point increase, the ECB has raised its benchmark deposit rate from minus 0.5 per cent to 3.75 per cent in one year, the fastest credit tightening since the euro currency was launched in 1999.

The last time the bank raised the interest rate to 3.75 per cent was in October 2000 before they brought it down to 3.50 per cent in May 2001 before the currency was even in circulation.

The rate hikes are already working: House prices have started to decline after a yearslong rally, while business loans are at their lowest level since statistics started in 2003. The outlook for construction companies in Germany also hit its lowest level since 2010.

Fears about recession are focusing on Germany, Europe’s industrial powerhouse and largest economy. It is the only developed economy that the International Monetary Fund expects to shrink this year.

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