European Central Bank raises interest rates but slows pace

Like the Federal Reserve has done, the ECB is stepping back from a string of jumbo hikes aimed at snuffing out inflation

A tram drives past the European Central Bank building in Frankfurt, Germany, on May 2, 2023.Michael Probst (AP)

The European Central Bank slowed the pace of its interest rate increases Thursday, stepping back like the U.S. Federal Reserve from a string of jumbo hikes aimed at snuffing out inflation. The ECB’s quarter-point hike follows evidence that its efforts are working by making mortgages and business loans harder to get.

The decision comes a day after the Fed approved a quarter-point increase and hinted that it may be the last for now. But the central bank for the 20 countries that use the euro currency started later and may still have further to go even as economic growth slows to a crawl and U.S. bank instability stirs new fears of financial turmoil.

The ECB said in a statement that inflation “has declined over recent months, but underlying price pressures remain strong.” It says its previous streak of six big hikes of half- or three-quarters of a point are being “transmitted forcefully” by making loans harder to get but how that affects the rest of the economy isn’t yet clear.

The ECB’s lending survey this week showed that banks are getting stricter about giving loans and that consumers and companies are asking for less credit and fewer mortgages.

Making it more expensive to borrow can cool off spending, easing pressure on prices but potentially weighing on economic growth. Demand for housing loans in the eurozone plummeted in the first three months of the year, following the sharpest decline since statistics started in 2003 at the end of last year.

Market observers are waiting for ECB President Christine Lagarde’s news conference for clues about the bank’s future steps, especially with inflation still high at 7%.

It has been fueled by Russia’s invasion of Ukraine, which drove up oil prices and led Moscow to cut off most natural gas to Europe. Energy costs have since fallen, but the surge is still feeding through to higher prices for goods, services and food.

The spiking cost for Europeans to feed their families has become the new pain point. Food prices jumped 13.6% in April from a year earlier, following a 15.5% annual increase the month before.

So-called core inflation, which excludes volatile fuel and food prices, fell only slightly in April from a record the month before. It’s considered a clearer picture of whether price pressures are building up in the economy from demand for goods and higher wages.

Workers across Europe have been striking for wages that keep pace with inflation, with analysts saying average pay rises could hit 5% this year — driven by eye-catching deals like German public employees’ 11% salary increase over two years.

The ECB slowed down even though renewed turmoil in the U.S. banking system appears — so far — not to be shaking the stability of Europe’s banks, the chief source of credit for businesses.

U.S. officials seized First Republic Bank this week and sold it to JPMorgan Chase, the third major bank failure following the collapse of Silicon Valley Bank and Signature Bank in March.

The earlier upheaval enveloped long-troubled Swiss lender Credit Suisse and led to a government-orchestrated takeover by rival UBS, but European financial officials say their banks have minimal direct exposure to the U.S. troubles.

The central bank has pressed ahead with rate hikes despite concerns about their impact on economic growth. The eurozone barely scraped out 0.1% growth in the first three months of the year compared with the previous quarter.

The ECB’s decision brings its benchmark rate on deposits from banks to 3.25%.

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