The European Central Bank (ECB) raised its base interest rate a quarter point on 4 May after making six consecutive half-point increases since embarking on its current campaign of tightening in July last year.

The rate now stands at 3.25 percent, its highest in 15 years.

After the hike, the euro slipped 0.4 percent against the dollar to $1.101 and closed at $1.100 on 8 May.

The bank’s move came a day after the U.S. Federal Reserve also raised its key rate by a quarter point.

The long-term slide in natural gas prices allowed the ECB to ease its pace of hikes, as we report in “Europe’s Natural Gas Prices Fall to Lowest Since Ukraine Invasion” in this issue.

However, the ECB indicated it will continue boosting its rate to wrestle inflation—running at 5.6 percent across Europe in April—back to the bank’s 2-percent target. Inflation in the 19-member Eurozone ticked up to 7 percent last month, its first rise in six months.

“We have more ground to cover and we are not pausing,” ECB president Christine Lagarde told a press briefing after the bank’s governing council met. “We all concluded that inflation is too high and has been so for too long.”

However, the central bank’s rate is now in “restrictive territory,” Lagarde said, and early signs of tightening credit factored into the decision to raise the rate by a smaller amount.

Following the U.S. banking crisis in mid-March, demand for loans, as well as lending criteria, have tightened in the Eurozone at the fastest pace since the Great Recession, the region’s banks have told the ECB, according to the Financial Times.

The ECB’s lesser increase “is a signal the ECB does not want to risk overdoing it, is seeing some signs the economy is starting to cool, and is mindful of spillovers from U.S. banking sector fragilities to European credit conditions,” Katharine Neiss, chief European economist at PGIM Fixed Income, told The Wall Street Journal.

The ECB began raising rates later than the Fed and has had to balance the need to keep rates at pace with inflation against Europe’s sluggish economic recovery. So far, the European Union has barely avoided a recession twice, once late last year and again in this year’s first quarter.

The bank also has had to manage borrowing costs and support programs to keep heavily indebted nations in southern Europe from falling into crisis.

The new rate is “likely to constrain economic growth,” the FT noted, which nudges up the risk of inflation once again.

Demand for business and housing loans has declined the most since 2008, an ECB survey found last week, indicating that higher rates are having the bank’s intended effect of slowing demand and, ultimately, the overall economy.

“Even without further acute stress in the banking system in Europe, tight credit conditions are here to stay, ultimately leading to credit contraction and recession,” economist Anna Stupnytska at Fidelity International said to the FT.

Analysts also expect the bank to bump the rate twice more by July, raising it by a quarter point each time to a peak of 3.75 percent, matching the ECB’s record-high rate set in 2001.

TREND FORECAST: The bet on The Street is that sharply lower natural gas prices and China’s resurgent demand for Europe’s imports, will manage a slight economic gain this year. But as we note in this Trend Journal, China’s April imports slumped, falling 7.9 percent year on year, while exports increased at a slower pace, rising 8.5 percent but down from the March’s 14.8 increase.

Europe’s largest economy, Germany, saw its exports in April fall 5.2 percent from March to China and the U.S. while its industrial production fell 3.4 percent in March compared to February… racking up its worst slump in 12 months according to government data. 

Therefore, as interest rates go up, it is clear that the EU economies will go down… into Dragflation: Declining economic growth and rising inflation.

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