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European Central Bank hikes rates by a quarter-percentage point

<i>Daniel Roland/AFP/Getty Images</i><br/>The European Central Bank raised interest rates by a quarter of a percentage point on May 4
AFP via Getty Images
Daniel Roland/AFP/Getty Images
The European Central Bank raised interest rates by a quarter of a percentage point on May 4

By Hanna Ziady, CNN

The European Central Bank raised interest rates by a quarter of a percentage point Thursday, the smallest increase since it started hiking in July, after data this week showed core inflation cooling and banks pulling back sharply on lending.

The decision comes a day after the US Federal Reserve also increased rates by a quarter-point, and takes the benchmark rate across the 20 countries that use the euro to 3.25%. The ECB has now raised borrowing costs at seven consecutive meetings since July in a bid to get inflation under control.

And ECB President Christine Lagarde hinted at further rate hikes to come. “We have more ground to cover and we are not pausing,” she told reporters later on Thursday, adding that interest rates were not yet “sufficiently restrictive.”

In its statement, the ECB said inflation had declined over recent months, but underlying price pressures “remain strong.”

“At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain,” it added.

Rising prices and higher interest rates have taken a toll on the euro area’s economy, which only narrowly avoided a recession in the first three months of the year.

While still some way off its highs, inflation in the region ticked up to 7% in April, from 6.9% in March, according to an initial estimate Tuesday from the EU statistics agency. The labor market has also tightened — unemployment dipped to 6.5% in March.

But core inflation, which strips out volatile food and energy prices, unexpectedly eased to 5.6% in April — sending a signal that price rises, while still steep, could be slowing. The ECB targets an inflation rate of 2%.

Lagarde stressed that the central bank’s fight against inflation was far from over. “There are still significant upside risks to the inflation outlook,” she said, citing increases in wages and the war in Ukraine, which could once again push up energy and food prices.

On the other hand, “renewed financial market tensions” could bring inflation down faster than expected, Lagarde said.

Since the ECB’s last meeting on March 16 — just days before the emergency sale of Credit Suisse to rival UBS — the outlook for bank lending has weakened further, potentially reducing the need for future rate hikes.

Banks in the euro area, citing anxiety about the economy and lower appetite for risk, have “substantially” tightened their criteria for extending credit, the ECB said in a closely watched report Tuesday.

Lagarde noted on Thursday, however, that the effects of that on the real economy were less clear so far. “We are not yet seeing the complete impacts we desire in order to arrive at the 2% target,” she said.

The Fed also pointed to tougher bank lending standards on Wednesday, as it raised its benchmark federal funds rate to 5%-5.25%. “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation,” it said in a statement.

A key Fed survey of bank lending activity in the first quarter will be published next week.

Correction: A previous version of this article misstated the level of the ECB’s benchmark rate.

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