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Even as euro zone economic growth falters, the European Central Bank raised interest rates to a record high to cool consumer prices.
On Thursday, the European Central Bank made the decision to raise the deposit rate for the 10th time in a row by 25 basis points to 4%, and officials lowered their growth expectations for the euro zone economy.
The euro fell 0.24% to $1.07 after the ECB Governing Council decision in Frankfurt. The yield on rate-sensitive two-year German Bunds, considered the euro zone’s benchmark, fell 0.04 percentage point to 3.13%.
Many economists predict that rate hikes by major central banks are coming to an end as inflation is falling and economic growth is slowing under pressure from rising borrowing costs.
The ECB’s decision is the most important in more than a year, with more dovish Governing Council members pointing to signs of weak economic growth, slowing bank lending, a cooling labor market and falling inflation to call for a pause. But hawks worry that inflation remains too high.
The Federal Reserve and Bank of England will meet next week.
Thursday’s decision takes the ECB’s deposit rate above a record high set in 2001, when rate setters raised borrowing costs to boost the value of the newly minted euro.
The decision suggests policymakers remain more worried about the risk of consumer price growth above target than the risk of a sharp economic downturn.
Economists have downgraded euro zone growth forecasts in recent weeks after industrial production and retail sales fell in July and business surveys showed further subdued conditions in August. Rate setters believe slowing economic activity could ease price pressures.
Eurozone inflation has fallen to 5.3% in August from a peak of 10.6% last year.
Inflation is expected to continue falling, although it is not expected to reach the European Central Bank’s 2% target until 2025. The recent rebound in oil prices has fueled concerns that the deflationary journey will be bumpy.
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