Even after a 10th straight rate increase, growth estimates were lowered as inflation forecasts increased.
In what might have been the closest decision in the European Central Bank’s quarter-century history, its governing council decided on a 10th consecutive increase of its official deposit rate to 4%. It will probably be its last this cycle. The accompanying statement, which President Christine Lagarde cited at least twice in her post-meeting briefing, concluded that interest rates have reached levels that “will make a substantial contribution to the timely return of inflation to the target.
The policymakers’ bind is that the increase could also make a substantial contribution to the slowing euro economy. ECB economists lowered growth estimates substantially through 2025, although even these reduced forecasts look way too optimistic. Inflation, however, was seen accelerating more than previously expected this year and next, and although there was a modest trimming of 2025’s core forecast, price increases will remain above the bank’s 2% target.
This could be seen as the last hurrah of the hawks, and the recent rise of crude oil over $90 a barrel may have further helped swing the balance. The prospect of another increase in the benchmark rate later this year is still technically alive, but it may not survive for much longer. With euro money supply turning negative, the risks now are that the ECB has blundered straight into a stagflationary trap.
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