"Inflation continues to be too high for too long," said the European Central Bank (ECB). It raised interest rates again on Thursday but slowed the pace, taking into account both the timid decline in inflation, excluding energy prices, and weak economic growth in the euro zone. Key policy rates were raised by 0.25 percentage points, as expected by most analysts after a series of sharp increases since July 2022. This is the seventh rate hike in ten months but the ECB's most moderate move since it began its tightening.

ECB interest rates are now in a range of 3.25% to 4%, the highest since October 2008. The guardians of the euro did not disclose in their statement whether this is the end of the unprecedented cycle of monetary tightening aimed at controlling the surge in consumer prices. This question should be at the heart of the press conference of the president of the institution, Christine Lagarde, from 12:45.

This more moderate increase seems to signal that the ECB has "entered the final phase of its current tightening cycle," said Carsten Brzeski of ING Bank. By making credit more expensive, the ECB wants to curb the demand for mortgages, consumer loans or for business investment and thus slow down price increases.

Inflation at 7% in April

The 26-member ECB's Governing Council had a wealth of fresh data at their disposal. Inflation in April still sailed well above the 2% target, regaining 0.1 percentage points to 7.0% after months of slowdown. But excluding energy, food, tobacco and alcohol prices, "core" inflation fell for the first time in a year, to 5.6% from 5.7% in March, according to Eurostat.

A significant slowdown in inflation is not expected in the short term, given the wage increases granted in several sectors, such as in Germany for public service employees.

Progressive impacts

In the banking sector, lending conditions are tightening as not seen since the 2011 sovereign debt crisis and demand for credit is suffering, according to the latest ECB data. Monetary tightening is gradually having its effect: "all these impacts will continue to spread in the economy gradually, it is not over," predicted at the end of April the chief economist of the ECB Philip Lane.

The weak growth of the euro area's gross domestic product, at 0.1% in the first quarter, attests to the slowdown desired by the ECB, but also to the vulnerability of the euro area economy. Economists expect the deposit rate to peak between 3.50% and 3.75% by the summer low. "Once this 'plateau' is reached, interest rates should stabilise for a relatively long time," believes Maxime Mura, portfolio manager at Swiss Life Asset Managers.

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