ECB raises base rate to 2.5%

The European Central Bank has slowed the pace of its interest rate increases in line with policymakers in the US and UK, raising borrowing costs by half a percentage point on Thursday and warning of further rate rises to come, Report informs referring to Financial Times.

The ECB met the expectations of most economists by raising its deposit rate from 1.5 percent to 2 percent, its highest level since the global financial crisis in 2008. In its previous two rate-setting meetings, the central bank raised borrowing costs by 0.75 percentage points each time.

“Interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation,” the ECB said. “Inflation remains far too high.” The yield on the 10-year German government bond rose 0.1 percentage points to 2.031 percent while the yield on the 10-year Italian bond added 0.22 percentage points to 4.08 percent. Yields rise when bond prices fall.

Eurozone inflation fell from a record high of 10.6 percent in October to 10 percent in November, bolstering investors’ hopes that price growth will decelerate towards the ECB’s 2 percent target and allow its policymakers to stop raising rates early next year.

The European Central Bank (ECB) will announce its policy decisions at 13:15 GMT, followed by a news conference of President Christine Lagarde at 13:45 GMT, Report informs referring to Reuters.

The ECB is set to raise interest rates for a fourth straight time on Thursday, albeit probably by a smaller increment, and lay out plans to drain cash from the financial system as it fights runaway inflation.

The central bank for the euro zone raised the interest it pays on bank deposits from -0.5% to 1.5% in just three months, reversing a decade of ultra-easy money after being caught wrong-footed by the sudden rise in prices.

But this brisk tightening cycle was likely to slow down at the December 15 policy meeting as inflation showed signs of peaking and a recession loomed.

The ECB was seen raising interest rates by half a percentage point this week after two 75-basis-point hikes in its two previous gatherings, mirroring the US Federal Reserve's own change of pace on December 14.

But like the Fed, the ECB was also expected to flag further hikes ahead to persuade investors that it is still serious about fighting inflation, which could stay above its 2% target through 2025.

Economists polled by Reuters expected the ECB to raise the rate it pays on bank deposits to 2% on December 15 before pushing it to 2.5% by March and 2.75% by June.

The ECB was also due to lay out plans to stop replacing maturing bonds in its 5 trillion-euro portfolio, reversing years of debt purchases that have turned the central bank into the biggest creditor of many euro zone governments.

The move, which mops up liquidity from the financial system, is designed to let long-term borrowing costs rise and follows a similar step by the Fed earlier this year.

Overall, the ECB is seen letting 175 billion euros ($186.01 billion) worth of debt expire next year, according to a Reuters poll, pointing to a 15-20-billion-euro monthly reduction depending on the start date.