The European Central Bank has been urged to pause further interest rate rises amid growing recession fears after lifting them by 0.25 percentage points to a joint record high.
Concerns that European property prices have slumped were cited by analysts among reasons for the central bank to freeze the cost of borrowing on its three key interest rates.
The latest increase pushes the ECB’s deposit rate, which is paid on commercial bank deposits left overnight with the central bank, to 3.75%, matching the previous record set in 2000-01.
The ECB president, Christine Lagarde, left the door open for further rate rises after she said the governing board would be “data dependent” about its next steps.
Speaking in Frankfurt after the US Federal Reserve also raised interest rates by 0.25 percentage points, Lagarde said the ECB will keep interest rates at “sufficiently restrictive levels for as long as necessary” to bring inflation down to its 2% target.
She said: “We want to break the back of inflation and will get there, come what may.”
Its main refinancing operations, the rate banks pay when they borrow money from the ECB, rose to 4.25% – the highest in more than two decades.
Eurozone inflation has fallen from 10.6% last year to 5.5% in June, though the level of prices growth varies from 1.9% in Spain to 9.7% in the Czech Republic. German inflation was 6.7% in June, fuelled by a 13.4% increase in the cost of food.
At the moment, the outlook for economic growth and inflation in the eurozone remains highly uncertain, according to the ECB.
Lagarde said there were downside risks to growth from Russia’s war against Ukraine, or the possibility of a wider increase in geopolitical tensions that could hit trade and push prices higher over the coming months.
She said further impetus to the rising costs of energy and food could follow Russia’s withdrawal from the Black Sea grain initiative.
However, economic growth across many eurozone countries, and especially its largest economy, Germany, is slowing, raising concerns of higher unemployment.
Moritz Schularick, president of the Kiel Institute, a leading German economic thinktank, said: “The ECB has effectively shown its teeth in the fight against inflation, with the inflation rate roughly halved from its peak.
“From a risk management perspective, after such sharp interest rate hikes, there is much to be said for now waiting for the effects on the real economy and taking a pause to be able to validly assess the impact of the rate hikes.”
Eurozone blue-chip company shares rallied to their highest in more than 15 years on the expectation that further increases may not be needed to bring inflation down to 2%.
Alex Livingstone, the head of foreign exchange trading at Titan Asset Management, said: “The ECB decided to follow in the Fed’s footsteps today hiking rates by 25bps to 4.25%. However, the language in the statement struck a more dovish tone than markets anticipated as the ECB gestured to clearer signs of inflation easing and admission of tightening financial conditions weighing on demand.
“This is a clear nod to economic growth becoming a more important topic of focus down the line as inflation dissipates.”
Daniela Hathorn, the senior market analyst at Capital.com, said: “They (ECB) have hiked as expected. But if you look at some of the keywords, they have actually started to take some of the most aggressive messaging out.
“We’re starting to see a little bit of a shift here in the potential that we may see another rate hike and that may be it.”
The Bank of England is expected to raise its base rate to 5.25% next week.
