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European interest rates raised 0.5%

Shoppers on Oxford Street in London pass a sale sign in a shop window Thursday after the Bank of England raised its key Base Rate by 0.5% to 3.5%. (AP/Alastair Grant)

The European Central Bank raised interest rates half a percentage point Thursday, moderating its pace from recent meetings, but warned rates will still need to climb "significantly" next year.

European policymakers are trying to calibrate the right amount of economic braking needed to bring down record-high inflation, even as the region's economy slows.

The annual rate of inflation in the eurozone slowed last month to 10%, the first deceleration in more than a year. Although it is an encouraging sign for central bankers, especially as it was accompanied by lower inflation rates in the United States and Britain, policymakers are not rushing to end their battle against high inflation.

Staff at the European Central Bank said inflation is expected to average higher than previously expected this year and next and will still be above the bank's 2% target in 2025.

"The Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target," the bank said in a statement Thursday.

Across the 19 countries that use the euro, prices are increasing at vastly different speeds. The annual rate of inflation last month slowed to 6.6% in Spain, but in Estonia, Latvia and Lithuania the rate remained at more than 21%.

And even if price increases are starting to slow, the outlook for inflation is uncertain and, in Europe, heavily influenced by volatile energy prices. Policymakers are alert to signs that this period of high inflation is becoming embedded in the economy, especially through higher wage demands.

They are also wary of expensive and untargeted government policies to insulate households from high energy prices, because this risks increasing economic demand, causing inflation to persist.

"Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations," the bank said Thursday.

From its July meeting through its one in October, the European Central Bank already raised interest rates by 2 percentage points, the fastest pace of tightening in the central bank's two-decade history.

On Thursday, the central bank went further and increased its deposit rate, which is what banks receive for depositing money with the central bank overnight, from 1.5% to 2%, the highest since January 2009.

Christine Lagarde, president of the central bank, previously warned that a slowdown in economic growth, including a shallow recession, will not be enough to meaningfully slow inflation, and central bank action will still be needed.


The Bank of England on Thursday raised its benchmark rate by half a percentage point to 3.5%, the highest level in 14 years.

It was the ninth consecutive increase since December 2021 and follows last month's outsize three-quarter point rate increase, the biggest in thirty years.

This time officials opted for less aggressive action after data this week showed inflation slipped from a 41-year high.

The Bank of England voted last month to raise its key rate by three quarters of a point, to 3%, the biggest increase in three decades. The bank justified the aggressive move by saying it was needed to beat back stubbornly high inflation that's eroding living standards and threatens to trigger an extended recession.

The bank forecast last month that inflation will peak at about 11% in the last three months of 2022, up from 10.1% in September. The bank said inflation is expected to then start slowing next year, dropping below the bank's 2% target within two years.

Information for this report was contributed by Eshe Nelson of The New York Times and The Associated Press.

Print Headline: European interest rates raised 0.5%


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