European Central Bank Raises Rates Again, but Only a Quarter Point

The slowdown in policy tightening comes as traders bet that other major central banks, particularly the Federal Reserve and Bank of England, are much closer to pausing rate increases. On Wednesday, the Federal Reserve raised rates by a quarter point, bringing them above 5 percent for the first time since mid-2007, while signaling that future increases were no longer a certainty.

Even as inflation has peaked in the United States and Europe, policymakers have been careful to keep their options open about their next moves. Traders are betting that rate increase cycles are nearly over, and some analysts have raised concerns that rate increases could go too far and inflict unnecessary damage on economies around the globe. But policymakers have been eager to see firm evidence that domestic inflation pressures have moderated enough for inflation to return to their 2 percent targets.

When the European Central Bank last set policy rates, in mid March, financial markets were gripped by turmoil among banks, after two banks in the United States failed and giant Swiss lender Credit Suisse, under stress, was bought by its rival UBS.

At the time, Christine Lagarde, the president of the central bank, said that if the banking uncertainties faded, and the central bank’s outlook for inflation stayed the same, then policymakers would need to keep raising rates. Even though a third U.S. bank, First Republic, collapsed this week, banks in the eurozone have weathered the market turmoil leaving room for the central bank to keep raising interest rates.

On Thursday, the central bank said that future decisions by the 26-person Governing Council would “ensure that the policy rates will be brought to levels sufficiently restrictive” to return inflation to the 2 percent target and “kept at those levels for as long as necessary.”

The bank also said it expected to ramp up the shrinking of its balance sheet as it tightened its policy stance. From July, it will stop reinvesting the proceeds from maturing assets bought under its larger bond-buying program, which had about 3.2 trillion euros ($3.5 trillion) in assets at the end of April. In the past, bonds, mostly government debt, were purchased to encourage banks to do more lending and investments and generate more economic activity.