The European Central Bank hiked interest rates by 50 basis points on Thursday and signalled at least one additional 50 basis point hike, as the central bank remains focused on controlling inflation despite recent data that suggests inflation may have peaked in the Eurozone. Analysts predict the ECB will eventually raise rates to between 3.25% to 3.75%.

ECB President Christine Lagarde stated that the ECB will continue its current monetary policy tightening cycle, as inflation remains « way too high ». The ECB plans to raise interest rates by another 50 basis points in March and then assess the future monetary policy path.

The International Monetary Fund (IMF) has urged central banks to « communicate the likely need to keep interest rates higher for longer » to bring inflation back to target. The ECB has been increasing rates at a rapid pace to address rising inflation, which is a result of factors including the aftermath of the COVID-19 pandemic and the energy crisis following Russia’s invasion of Ukraine.

Recent economic data has eased some of the concerns, as price growth in the Eurozone slowed more than expected in January, according to figures from the European Union’s statistics office, helped by the mild winter and lower energy prices.

Despite higher borrowing costs, the Eurozone’s economy has proven to be broadly resilient and unexpectedly grew in the fourth quarter, defying expectations that the ECB’s aggressive rate hikes in 2022 could trigger a recession in the near term.

QoQ growth for Q4 2022 came at 0.1%, and the headline inflation reading of 8.5% last month is still above the ECB’s 2% target. Headline inflation has been declining since peaking at a record 10.6% in October but core prices, which exclude volatile items such as food and fuel, have been rising at a steady pace.

ECB officials will have a chance to gather further inflation numbers before they make their next policy decision in March and were more hawkish compared to commentary by the U.S. Federal Reserve and the Bank of England, which was perceived by investors as dovish.