European Central Bank slows pace of hikes, raises interest rates by 25 bps

The European Central Bank raised interest rates by 25 bps on Thursday, signalling a drop in the pace of its rate hikes. The ECB followed US Federal Reserve's suit, which also announced a 25 bps hike late on Wednesday, but showed clear signs of stepping back from large rate hikes which are aimed at curbing inflation. In a statement, the bank said that inflation "has declined over recent months, but underlying price pressures remain strong." The move by the central bank for the 20 countries that use the euro currency are based on evidence that its attempts to curb rising inflation are working by making mortgages and business loans harder to get.

It said that its streak of six hikes of half- or three-quarters of a point are being "transmitted forcefully" by making loans harder to get but how that affects the rest of the economy isn't yet clear.

ECB President Christine Lagarde said at a news conference, "Based on the information we have today, we have more ground to cover, and we are not pausing." 

Associated Press reported that the ECB's lending survey released earlier this week showed that banks are tightening their checks before sanctioning loans and that companies and consumers are making lesser queries for credit and asking for fewer mortgages.

Although raising interest rates can ease inflation, cool off spending and ease pressure on prices, but it can potentially take its toll on economic growth. As per reports, Eurozone registered a drop in demand for housing loans in the first three months of the year, which came after the statistic recorded its sharpest decline since its inception in in 2003 at the end of 2022.

Inflation is high at 7 per cent and has been fueled by Russia's invasion of Ukraine, which drove up oil prices and led Moscow to cut off most natural gas to Europe. Energy costs have since fallen, but the surge is still feeding through to higher prices for goods, services and food.

Fed's quarter-point hike hinted that it may have reached the end of its hiking cycle.