The European Central Bank on Thursday raised its three main interest rates by 0.25%, after analysts had been divided on whether the eurozone's central bank would issue a 10th consecutive hike or pause the increases. 

However, as it announced its decision, the lender again signaled that it believed it had increased rates sufficiently to most likely tame inflation, hinting that its run of hikes might soon cease. 

"Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target," the ECB said in a statement.

“The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary," it added.

The changes put the main refinancing operations rate — the fee ordinarily charged to commercial lenders to borrow money and arguably the most important of the three — at 4.5%. 

The deposit facility, paid to lenders that deposit funds with the ECB on a short-term basis, rose to 4%.

And the marginal lending facility, paid by commercial lenders for short-term liquidity injections, was put at 4.75%.

Lagarde says inflation expected to remain high short-term

Inflation in the eurozone will decline at a slower pace than had been predicted three months ago, the ECB said.

The bank expects an annual inflation rate of 5.6%, compared to the previous estimate of 5.4% in June.

"Inflation continues to decline but is still expected to remain too high for too long," ECB President Christine Lagarde said at a news conference.

"We are determined to ensure that inflation returns to our 2% medium-term target in a timely manner," she said.

Lagarde said they "can't say that now we are at a peak" in responding to a question about consecutive hikes and that the decision to raise interest rates in the future would be "data-dependent."

Uncertainty prior to decision: either small hike or pause

The euro nudged up from a three-month low against the dollar on Thursday as traders waited on the ECB's decision.

The eurozone's interest rate setters faced a tough call, with the battle against stubborn inflation making the case for a rise and the fear that higher borrowing costs could hurt growth.

Expectations about the meeting were split between a pause in rate rises and an increase of 25 basis points. Market pricing had been leaning toward a hike.

Increasing interest rates is thought to help tame inflation, because it can discourage borrowing and spending, but it also runs the risk of stifling economic activity. 

Rising rates or a return to the pre-2008 normal?

The ECB, like the central banks of many more wealthy economies, slashed interest rates to unprecedented lows at or around zero in response to the financial crash of 2008, trying to encourage spending and moderate inflation. For years, this tactic was only marginally effective so the rates remained at or around historic lows.  

But a combination of factors — most notably the COVID pandemic and its aftereffects and then Russia's invasion of Ukraine, which put pressure on the prices of core goods like food and fuel — started pushing inflation past ECB targets of 2% in late 2021 and early 2022. By the summer of 2022, a few months later than the Federal Reserve in the US, the ECB began to act, increasing interest rates.

rc/msh (AFP, dpa, Reuters)