FRANKFURT, Germany (AP) 鈥� The European Central Bank piled on a Thursday, pressing forward in its fight against stubbornly high inflation that has been plaguing consumers even as worries grow that higher borrowing costs could help push the economy into recession.
The increase of a quarter-percentage point comes as central banks around the world, including the U.S. Federal Reserve, try to judge how much anti-inflation medicine is too much 鈥� and what鈥檚 the right point to halt their swift series of rate rates and people lose their jobs.
The decision raises the ECB鈥檚 benchmark deposit rate to 4%, up drastically from minus 0.5% just a little more than a year ago and the highest it has been since the euro was established in 1999.
Interest rates are at levels that 鈥渕aintained for a sufficiently long duration鈥� will make a substantial contribution to bringing down inflation, President Christine Lagarde said at a news conference.
鈥淔uture decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary,鈥� Lagarde said, adding that policymakers will keep relying on available data.
But she added that 鈥渨e can鈥檛 say that now, that we are at peak.鈥�
in the 20 countries that use the euro currency is well above the bank鈥檚 target of 2%, robbing consumers of purchasing power and contributing to economic stagnation 鈥� supporting arguments for the rate increase.
Pushing the other way was the growing awareness that higher borrowing costs are weighing on decisions by consumers and businesses to invest and spend and are becoming a .
鈥淭he ECB鈥檚 communcation was clear: today was the last hike in the current cycle,鈥� said Carsten Brzeski, chief eurozone economist for ING bank.
鈥淟ooking ahead, a further weakening of the economy and more traction in a deflationary trend will make it very hard to find arguments for yet another rate hike before the end of the year,鈥� Brzeski said.
Higher rates have slammed the real estate market, sending mortgage rates higher and ending a yearslong rally in home prices.
The major European economies 鈥� Germany, France, Spain and Italy 鈥� also saw shrinking activity in August in the services sector even at the tail end of a strong tourism summer in Spain and Italy, according to S&P Global鈥檚 surveys of purchasing managers. Services is a broad category that includes hotel stays, haircuts, car repairs and medical treatment.
That comes on top of a slowdown in global manufacturing that is , Europe鈥檚 biggest economy, particularly hard.
The eurozone economy has been teetering on the edge of recession since last year, growing only 0.1% in each of the first two quarters of this year.
Yet the economic picture because unemployment is at a record low of 6.4%. Labor shortages have sent people鈥檚 pay higher 鈥� one factor complicating the ECB鈥檚 inflation fight.
Also weighing on the outlook is a weaker euro against the as investors take the view that economic weakness will hit Europe and China. They are betting that the U.S. by finishing its rate hikes without pushing the economy into a downturn.
The Fed made its 11th rate increase in July, bringing its key rate to the highest level in 22 years after pausing in June. Economists and investors generally expect the Fed to skip a rate hike at its meeting next week, but it .
鈥� at 3.7% 鈥� than in Europe despite an upward bump from gasoline prices in August.
Central banks around the world have been hiking rates to stamp out inflation that broke out after the sharp economic rebound from the COVID-19 pandemic strained supply chains and Russia鈥檚 invasion of Ukraine sent food and .
The Bank of England last month, and markets think it鈥檚 more likely than not that the when it meets next week.
Interest rates combat inflation by raising the cost of credit for things people want to buy, particularly houses, and for business investment in buildings and equipment. That cools off demand for goods and relieves upward pressure on prices.
The flip side is that rate hikes can hurt economic growth if they鈥檙e overdone.
David Mchugh, The Associated Press
