Volkswacht Bodensee - ECB opens door to pause in rate hiking campaign

The Frankfurt-based institution increased its main rates a quarter percentage point, taking its benchmark deposit rate 3.75 percent -- its highest level since May 2001 and equal to its previous record high.

Borrowing costs have risen at their fastest pace ever in the bank's year-long hiking cycle to fight inflation.

In all, key rates have risen by 4.25 percentage points since the ECB made its first move in July last year after Russia's invasion of Ukraine sent prices for energy and food soaring.

While inflation has come down from its double-digit peak at the end of last year, the price gauge was still expected to remain "too high for too long", ECB president Christine Lagarde said at a press conference.

Consumer prices in the eurozone rose at 5.5-percent pace in June -- but still well above the ECB's two-percent target.

But Lagarde said the ECB would keep an "open mind" when it came to future rate decisions -- a marked departure from her past hawkish tone, which analysts said opened the door for a potential pause at the central bank's next meeting in September.

- 'Data dependent' -

The ECB was "moving to a stage where we are going to be data dependent", Lagarde said, pointing to new projections to be released alongside the bank's next meeting in September.

"On the basis of that we will determine whether we hike or whether we pause," Lagarde said.

Commenting after Lagarde's remarks, Jens-Oliver Niklasch from LBBW bank said: "Another rate hike is not off the table, but a little less likely today than yesterday."

The ECB decision came a day after the US Federal Reserve resumed its own hiking cycle with a quarter-point raise, following a decision to pause in June.

The US central bank signalled it could raise rates again if inflation proved stubborn.

For its part, the ECB stressed that "underlying inflation remains high overall".

Core inflation -- a closely watched measure that excludes volatile energy, food, alcohol and tobacco prices -- in fact rose to 5.4 percent in the eurozone in June, from 5.3 percent in May.

At the same time, there were factors that could drive inflation higher. Russia's exit from a landmark deal for the export of grain from Ukraine could push up food prices and posed an "upside risk" to inflation, Lagarde warned.

Officials at the Frankfurt-based central bank were also worried about the impact higher salaries might have on overall prices.

"Domestic price pressures, including from rising wages and still robust profit margins, are becoming an increasingly important driver of inflation," Lagarde said.

- 'Deteriorated' -

Meanwhile, high inflation meant that the "near term economic outlook for the euro area has deteriorated", Lagarde said.

Collectively, the 20 countries in the currency bloc fell into recession around the turn of the year, shrinking for two straight quarters.

Steep interest rate rises have also provoked an angry backlash from political leaders in southern eurozone countries, where debt levels are higher.

More hikes "could create a more difficult situation for growth at the European level", Portuguese Finance Minister Fernando Medina said ahead of Thursday's meeting.

Italy's far-right Prime Minister Giorgia Meloni similarly blasted the ECB's "simplistic recipe of raising interest rates" and warned "the cure risks proving more damaging than the disease".

M.Odermatt--BTB