ECB raises interest rates to 3.5 per cent

For the eighth time in a year, the European Central Bank aims to further quell inflation, a day after the US Federal Reserve left rates on hold

The European Central Bank's deposit rate is at its highest level in 22 years. AFP

The European Central Bank raised its benchmark interest rate by 0.25 per cent to 3.5 per cent on Thursday, in its continuing battle to reduce inflation in the eurozone from 6.1 per cent to its 2 per cent target.

At 3.5 per cent, the ECB's deposit rate is now at its highest level in 22 years.

"Inflation has been coming down but is projected to remain too high for too long," ECB president Christine Lagarde said.

"We are determined to ensure that inflation returns to our 2 per cent medium-term target in a timely manner."

Ms Lagarde said determination would be evident in future interest rate rises.

“Are we done? Have we finished the journey? No, we’re not at destination. Do we still have ground to cover? Yes, we have ground to cover,” she said.

She added that the ECB “will continue to hike at our next meeting."

"We are not thinking about pausing, as you can tell.”

Following 10 straight increases to US interest rates, the Federal Reserve left them on hold on Wednesday.

Economic growth forecasts

Commenting on inflation in the eurozone, Ms Lagarde the ECB now predicted it would average 5.1 per cent in 2023, 3.0 per cent next year and 2.3 per cent in 2025.

"Indicators of underlying price pressures remain strong, although some show tentative signs of softening," she added.

At the same time, the ECB trimmed its growth forecasts for this year and next, from 1 per cent predicted in March to 0.9 per cent for 2023 and from 1.6 per cent to 1.5 per cent for 2024.

Analysts said the ECB was playing an increasingly dangerous game with interest rates and could make the economic outlook worse.

“Despite good arguments against further rate hikes, the ECB simply cannot afford to be wrong on inflation,” Carsten Brzeski, global head of macro economics at ING, said in a research note.

“The Bank wants and has to be sure that it has slayed the inflation dragon before considering a policy change.”

Germany's two-year bond yield climbed 1.4 per cent to 3.178 per cent immediately following the interest rate decision.

Meanwhile, the euro gained ground, rising 0.1 per cent to $1.084.