London CNN —
The European Central Bank (ECB) raised interest rates by a quarter of a percentage point Thursday, judging that inflation remains too high even as data points to a deepening economic downturn in the 20 countries that use the euro.
The move takes the benchmark rate in the euro area to 3.75%, the highest since October 2000.
“Inflation continues to decline but is still expected to remain too high for too long,” the ECB said in a statement.
“The past rate increases continue to be transmitted forcefully: financing conditions have tightened again and are increasingly dampening demand, which is an important factor in bringing inflation back to target,” it added. The central bank targets a headline inflation rate of 2%.
The ninth consecutive hike by the ECB followed another rate increase by the US Federal Reserve, which raised benchmark borrowing costs by a quarter of a percentage point Wednesday to their highest level in 22 years.
US and European central bank officials remain concerned about consumer prices, although there is growing evidence that interest rate hikes are starting to tame inflation while also dampening economic activity.
Traders are convinced the Fed is done hiking, giving an 80% probability to no change at its next meeting, according to the CME FedWatch Tool.
Market participants will be looking for clues on the future path of interest rates in Europe when ECB President Christine Lagarde addresses journalists at 8:45 a.m. ET.
Recent evidence suggests the euro area may remain stuck in recession. Demand for business loans fell to a record low in the second quarter, according to a survey published by the ECB Tuesday. The report also found that banks had tightened credit standards further across all loan categories.
Separately, survey data released Monday showed that business activity in the eurozone contracted at the fastest pace in eight months in July.
An initial reading of the Purchasing Managers’ Index, which tracks activity in the manufacturing and service sectors, dropped to 48.9 from 49.9 in June. A reading below 50 indicates a contraction.
“Manufacturing continues to be the Achilles heel of the eurozone,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which produces the research in partnership with S&P Global.
“The eurozone economy will likely move further into contraction territory in the months ahead as the services sector keeps losing steam.”
Gross domestic product figures for the second quarter due out Monday will confirm whether the euro area is still in a recession.
Consumer prices in the region rose 5.5% in June compared with a year ago — a sharp slowdown from a record 10.6% in October 2022 but still well above the ECB’s 2% target.
Core inflation, which strips out volatile food and energy prices, inched down only slightly, suggesting that “underlying inflation has … plateaued,” Commerzbank senior economist Marco Wagner said in a note Wednesday.
— This is a developing story and will be updated.