Christine Lagarde, President of the European Central Bank (ECB), gestures at a press conference following the Governing Council meeting on July 27, 2023 in Frankfurt, western Germany.

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The European Central Bank announced a tenth consecutive hike in its key interest rate on Thursday, saying the fight against inflation took priority over a weakening economy.

Rate hikes have now seen the central bank’s main deposit facility rise to a record 4% from -0.5% in June 2022. A key reason for Thursday’s increase appeared to be an upward revision to newly released euro area macroeconomic forecasts, which show average inflation of 5.6% this year, up from a previous forecast of 5.4%, and average inflation of 3.2% % expect 3% next year versus a previous forecast of 5.4%.

However, it lowered its closely watched medium-term forecast to 2.1% from 2.2%.

In a market-moving statement, it also suggested that further interest rate hikes could be off the table for now.

“Based on its current assessment, the Governing Council is of the view that the ECB’s key interest rates have reached a level which, if maintained for a sufficiently long period of time, will make a significant contribution to the timely return of inflation to the target value,” it said.

“The future decisions of the Governing Council will ensure that the key ECB interest rates are set at a sufficiently restrictive level for as long as necessary.”

The euro fell sharply on the announcement, down 0.5% against the U.S. dollar at $1.0686 at 3 p.m. Frankfurt time, trading at a three-month low.

European stocks, meanwhile, rebounded after cautious trading during the morning, with the benchmark Stoxx 600 index rising 1.1%.

The ECB’s move on Thursday also sees interest rates on its main refinancing operations and marginal lending facility rise by 25 basis points to 4.5% and 4.75%, respectively.

Staff also cut economic growth forecasts for the euro area from 0.9% to 0.7% in 2023, from 1.5% to 1% in 2024 and from 1.6% to 1.5% in 2025.

While the ECB had clearly announced its next steps in previous meetings, economists and analysts were divided over whether the doves or the hawks would prevail in Frankfurt at the September meeting. Money markets were pointing to about a 63 percent chance of a rate hike by Thursday morning, compared with a more even distribution in recent days.

Oil market reports pointing to tighter supplies and higher prices for the rest of the year and beyond have stoked inflation fears alongside signs of wage growth. A Reuters article on Wednesday that said the ECB now expects euro zone inflation to stay above 3% in 2024 appeared to reinforce market bets on a rate hike. The report came from a source ahead of the forecast release on Thursday.

“Some [Governing Council] “Members did not reach the same conclusions and some governors would have preferred to pause and set aside future decisions once more certainty and intelligence had emerged through the passage of time and the impact of our many previous decisions,” said ECB- President Christine Lagarde CNBC’s Annette Weisbach in the press conference following the announcement.

“But I can tell you that a solid majority of governors agreed with the decision we made.”

Lagarde said there was no concrete answer as to whether the rate hikes had been completed as the Governing Council remained reliant on data – but she stressed that the ECB’s current thinking was reflected in the statement that interest rates would remain at current levels level would make a “significant contribution” to the fight against inflation if this were maintained long enough.

Germany downturn

Overall consumer price inflation in the Union was 5.3% in August, the same level as core inflation, which excludes food and energy costs.

Europe’s largest economy has seen continued deterioration, with business sentiment having collapsed and the services sector now declining along with manufacturing.

Germany is forecast to be the only major European economy to contract this year – although the overall picture is also bleak, with business activity in the euro zone falling in August to its lowest level since November 2020.

Peter Schaffrik, chief European macro strategist at RBC Capital Markets, told CNBC that the market’s focus will not be so much on the rate hike itself, but rather on the language the central bank uses in its statement.

Schaffrik said a focus will be on the 2025 inflation forecast, which has been revised downwards in contrast to the 2023 and 2024 forecasts, as this is usually what the ECB means when it talks about the medium term.

Another point will be that interest rates are maintained for a “sufficiently long period” – suggesting that “the path forward has been flat for some time,” he said.

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