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European Central Bank Raises Interest Rates Again as Eurozone Inflation Continues

The European Central Bank raised interest rates on Thursday to the highest levels since 2008, maintaining an aggressive policy even as the eurozone’s overall inflation rate appears to have peaked.

In a well-telegraphed move, the central bank raised its three interest rates by half a percentage point, lifting the benchmark deposit rate to 2.5 percent.

The E.C.B. said in a statement that it would “stay the course in raising interest rates significantly at a steady pace,” and indicated that further increases could be expected, including by another half a point in March.

“Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations,” the bank said in a statement.

While Europeans face tight financial conditions, the region has been surprisingly resilient to recent economic turmoil even as the war in Ukraine continues into a second year. Data published on Tuesday showed that the countries that use the euro had forestalled a recession late last year, and other economic indicators suggest the outlook is brighter than expected just a few months ago, in large part because natural gas prices have come down from their peak in August.

Still, significant risks remain, particularly from persistent inflationary pressures. A recession may be avoided this year, but the eurozone is likely to experience a sharp economic slowdown as the effects of higher interest rates constrain the economy and inflation eats away at household budgets.

On Wednesday, data showed that the annual rate of inflation in the eurozone fell to 8.5 percent in January, from 9.2 percent the previous month. The data suggested inflation peaked in October, at 10.6 percent, but policymakers insist that the battle against high inflation in the region still hasn’t been won.

In several countries, including France and Spain, the rate of inflation rose in January. Core inflation, a measure closely watched by policymakers because it indicates how deeply rising prices are embedded in the economy, remains stubbornly high. In January, the annual rate of core inflation, which excludes food and energy prices, was 5.2 percent, holding steady at a record high.

The E.C.B.’s action came nearly an hour after the Bank of England raised its benchmark rate half a point, to 4 percent — its highest level since October 2008. On Wednesday, the U.S. Federal Reserve raised rates a quarter point, to a range of 4.5 to 4.75 percent. It was the Fed’s eighth increase in a year but the smallest since March, as officials said that inflation had finally started to meaningfully ease and the global economy was less imperiled than it seemed last year.

After an initial slow start withdrawing easy money last year, the central bank began raising interest rates in July. Since then, it has undertaken the fastest pace of monetary tightening in the bank’s two-decade history.

Christine Lagarde, the bank’s president, stressed in a news conference Thursday that the E.C.B. remained resolved to raise interest rates to the point where they would restrain economic activity and “once we are there, stay sufficiently” so interest rates return inflation to 2 percent in the medium term.

The challenge policymakers around the world face this year is determining when to halt rate increases. There are signs that inflation has peaked in the United States, Britain and many eurozone economies. At the same time, central banks are aware of the lag effect in monetary policy, which means much of the effect of last year’s rate increases still haven’t been felt in the economy. Traders are now betting that most major central banks will only raise rates a few more times this year.

Andrew Bailey, the governor of the Bank of England, said Thursday that “we have seen a turning of the corner” on inflation. “But it’s very early days and the risks are very large.”

The Bank of England’s policymakers softened their tone on future interest rates increases, which some analysts took as an indication that the end of this tightening cycle is approaching. But Ms. Lagarde kept up her more aggressive stance, and said that even beyond March more rate increases are likely.

“We know that we have ground to cover,” she said. “We know that we are not done.”

European policymakers remain worried that inflation in the region could last longer than expected, especially because the tight labor market is pushing up wages. Although wages are not rising fast enough to keep up with inflation and prevent households from a loss of purchasing power, there are concerns that wage agreements are rising in a way that would be inconsistent with inflation quickly returning to the central bank’s 2 percent target.

In addition, Ms. Lagarde reiterated her concerns that government fiscal supports, especially those designed to shield households from high energy costs, could add to inflationary pressures if they didn’t adjust to the fact that natural gas prices are lower than when these policies were set.

Ms. Lagarde opened her remarks by welcoming Croatia, which last month became the 20th country to adopt the euro.

Plans to shrink the bank’s substantial bond holdings, a remnant of its extraordinary policies that were intended to stoke economic demand, are to begin in March. The bank will unwind its asset purchase program, which holds bonds worth about 3.3 trillion euros ($3.6 trillion), by about €15 billion per month until the end of June, and the pace afterward would be decided later, it said.

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