After raising interest rates for the 10th time, the European Central Bank is signaling that it might happen

The European Central Bank on Thursday raised interest rates for the 10th straight time – and perhaps the last – in the bank’s efforts to force inflation down.

The bank raised its three key interest rates by a quarter of a percentage point, raising the deposit rate to 4 percent, the highest level in the central bank’s history in two decades.

“Inflation continues to fall but is expected to remain very high for a very long time,” Christine Lagarde, the bank’s president, said on Thursday. She added that policymakers raised interest rates to “consolidate progress” in curbing inflation.

But in a sign that the latest increase may be the last, Lagarde said she and her fellow policymakers consider that “interest rates have reached levels that, if maintained for a sufficiently long period, will contribute significantly to achieving returns in due course.” Inflation to a target of 2 percent.

Heading into Thursday’s meeting, the bank’s decision was seen as a toss-up between raising interest rates or keeping them steady, as policymakers weighed progress in lowering inflation against their determination not to declare victory too soon. Investors’ bets in financial markets are tilted toward a slightly greater likelihood that the bank will raise interest rates rather than keep them steady.

Next week, policymakers at the Federal Reserve and the Bank of England will set interest rates. Fed officials are widely expected to keep interest rates steady, but the recent acceleration in U.S. inflation may keep open debate about another increase later in the year.

In Britain, officials will receive new inflation data just before the policy meeting, which could impact expectations, although investors are currently betting that there is a greater chance of interest rates being pushed higher than not. This will be the bank’s fifteenth consecutive increase in interest rates.

Over the past year, the European Central Bank has begun its most aggressive period of monetary policy tightening, raising interest rates from negative levels in July last year to a record high. During that period, eurozone inflation, which reached a peak of 10% in October, has since halved.

“Is it a disease?” Ms. Lagarde said. “no.”

Consumer prices rose 5.3 percent in August compared to their level a year ago, the same pace as the previous month and defying economists’ expectations of a slowdown due to a jump in fuel prices. At the same time, domestic inflationary pressures, closely monitored by policymakers, remained strong. Core inflation, which does not include food and energy prices, was 5.3 percent.

The central bank on Thursday published new economic forecasts by its staff, which said inflation will be slightly higher this year and next than expected three months ago due to higher energy prices. In 2025, inflation will be just above the bank’s 2 percent target, so policymakers have tried to pave the way for an extended period of high interest rates that would constrain the economy further. Indeed, demand for loans from businesses and households has weakened, and banks have begun to tighten lending standards.

Lagarde said at a press conference in Frankfurt that previous increases in interest rates were “strongly transmitted” to the economy, adding that the strength of this transmission was faster than in previous times the central bank raised interest rates. “Financing conditions have been tightened further and demand is increasingly weakening, which is an important factor in bringing inflation back to target.”

The bank also lowered its forecast for economic growth over the next three years, with the economy growing by just 0.7 percent this year.

“We are going through a period of very slow growth,” Lagarde said. She added that “difficult times are passing now,” and economic recovery expectations have been postponed to 2024.

Earlier this week, the European Commission lowered its forecast for the region’s economy, expecting the euro zone to grow by 0.8 percent this year, down from its forecast of 1.1 percent four months ago. The economy will also grow more slowly next year.

Germany, the largest economy in the region, is suffering from a recession as its industrial sector suffers under the weight of high interest rates and other costs. Last month, business activity declined at its fastest rate in more than three years.

“Against the backdrop of weaker growth, the ECB is likely to pause at the next meeting, and if growth expectations continue to deteriorate, the pause could turn into a peak,” Mike Bell, a strategist at JP Morgan Asset Management, said in a written commentary. . . He added that unless the region’s unemployment rate rises sharply, rates could remain on hold “for some time.”

Amid these deteriorating economic expectations, traders are betting that the central bank will not start lowering interest rates until the second half of next year.

Ms. Lagarde said policymakers had not even begun to discuss the idea of ​​lowering interest rates, and when she spoke to reporters, she pushed back on the idea that this was definitely the last rate hike, to maintain flexibility on future decisions. She said the view that interest rates are high enough to reduce inflation is based only on the “current assessment” of the data and that expectations could change.

There were signs of division among the central bank’s 26-member governing council over the best way forward on interest rates. The inflation rate in the euro area ranges from 2.4 percent in Spain and Belgium to 9.6 percent in Slovakia. At the same time, levels of indebtedness and the prevalence of variable rate mortgages vary between countries, so the impact of higher interest rates is felt more quickly in some countries than in others.

Earlier this month, Klaas Knott, head of the Dutch central bank, told Bloomberg News that markets were underestimating the chance of an interest rate increase in September, and he urged Peter Casimir, head of the Slovak central bank, to “take another step.” But Mario Centeno, governor of the Portuguese Central Bank, warned against “exaggerating this.”

Ms. Lagarde confirmed the disagreement on Thursday, saying the interest rate increase was not a unanimous decision. She said that while a “large majority” of the council supported the increase, some would have preferred to pause while waiting for more information on the impact of previous interest rate increases.

Lagarde said that in the future, interest rates will be set at “sufficiently restrictive levels for as long as necessary,” reiterating that decisions will be made depending on the latest economic and financial data, inflation measures that capture domestic price pressures, and the strength of the impact of monetary policy on… Economy of the region.