The European Central Bank raised its deposit rate to a historic high on Thursday and kept its options open on whether more increases will be needed to bring down inflation against a worsening economic backdrop, according to Reuters.
Thursday’s hike, the ninth in a row, increases the rate that the ECB pays on banks’ deposits from 3.50% to 3.75%, its highest level since 2000, before euro banknotes and coins had even been put into circulation.
Inflation in the euro zone has halved since last October but at 5.5%, it remains well above the ECB’s 2% target.
On the other hand credit creation, demand for loans and economic activity have all slowed sharply, showing the ECB’s steady diet of rate hikes is already taking a toll on the economy.
“The developments since the last meeting support the expectation that inflation will drop further over the remainder of the year but will stay above target for an extended period,” the ECB said.
The ECB has now increased borrowing costs by a combined 4.25 percentage points in a year, its fastest pace on record. But a peak is now clearly in sight and the debate is set to shift to how long rates will need to be kept at current levels.
With Thursday’s decision the rate that banks pay to borrow at the ECB’s weekly auctions was also increased to 4.25% from 4.0% while daily loans will now cost 4.50%, from 4.25% previously.
Both facilities have been little used as the banking system is still awash with cash from a decade of monetary stimulus by the ECB.