FRANKFURT — The European Central Bank raised interest rates by 0.5 percentage points and said it intends to raise rates by the same magnitude in March to squash raging inflation.
The hike was widely expected and will take the key deposit rate to 2.5 percent, after the ECB has been increasing rates at a record pace from its all-time low of -0.5 percent in July.
But there had been doubts whether the Governing Council would pre-commit to another big hike next month after headline inflation dropped faster than expected and dovish policymakers called for more incremental moves.
The ECB’s announcement comes on the heels of a similar move by the Bank of England earlier Thursday. Late Wednesday, the U.S. Federal Reserve scaled back to a quarter-percentage-point rate increase after a year of larger hikes but signaled “ongoing increases” in borrowing costs.
While the ECB said rates need to go up “significantly at a steady pace,” it also said its subsequent policy path will be decided after the March policy decision. By then policymakers will have new ECB staff forecasts for growth and inflation at hand.
Ahead of Thursday’s announcement financial markets expected the ECB’s deposit rate to peak at 3.5 percent by the summer.
The ECB appeared to seek to dampen speculation that any peak would be short-lived and rates could come down soon, noting that “keeping interest rates at restrictive levels will over time reduce inflation.”
The statement also affirmed the ECB’s plans to let the size of its roughly €5 trillion stash of bonds decline by an average of €15 billion from the beginning of March 2023 until the end of the second quarter. The speed of the reduction thereafter is yet to be determined.