European Central Bank Lays the Ground for a Rate Increase or a Pause

For the past year, the European Central Bank has raised interest rates at every one of its policy meetings in an effort to rein in high inflation. Looking forward, that can no longer be the expectation.

In a well-telegraphed move, policymakers raised rates on Thursday for the 20 countries that use the euro currency by a quarter of a percentage point, pushing the deposit rate up to 3.75 percent, the highest since late 2000. But they kept their options open about future decisions amid weakness in the region’s economy.

Christine Lagarde, the president of the bank, broke from a recent trend on offering clear guidance and refused to give a firm indication about what the central bank will decide at its next policy meeting in mid-September. Instead she said rates could either rise for a 10th time or be held steady.

“We are deliberately data-dependent, and we have an open mind as to what the decisions will be in September and in subsequent meetings,” Ms. Lagarde said in a news conference in Frankfurt on Thursday. “We might hike, and we might hold. And what is decided in September is not definitive; it may vary from one meeting to the other.”

But one thing is certain: “We are not going to cut,” she said. “That is a definite no.”

The message came a day after the Federal Reserve raised interest rates a quarter-point, after holding them steady at the previous meeting.

Monetary policy tends to work its way through the economy slowly, which means that the impacts of past rate increases are only beginning to be strongly felt. This creates a challenge for policymakers, who want to be sure they have raised interest rates high enough to stamp out inflation but do not want to overdo their inflation-fighting efforts and cause unnecessary economic pain. Slowing the rate increases can give policymakers more time to see the reverberations of past increases, which is what the Fed has done.

The European Central Bank’s action on Thursday, its ninth consecutive rate increase, was warranted because inflation is “still expected to remain too high for too long,” Ms. Lagarde said.

But alongside concerns about the trajectory of inflation, Ms. Lagarde homed in on the economic outlook for the region, which she said was deteriorating in the near term. Part of the reason was that past rate increases were causing tighter lending conditions and declining demand for loans, she said.

The evidence has been accumulating: Consumer spending was being weighed down by high prices and tight credit conditions; the region’s manufacturing output was weak; housing and business investment were also showing signs of weakness; and the services sector, which has been the most resilient, was losing momentum.

Data this week showed that demand for loans in the eurozone decreased in the second quarter and lenders tightened credit standards for businesses and households. Separate data showed an index of economic activity dropped to its lowest level in eight months in July, as the manufacturing industry contracted further and the services sector slowed down.

“The slump in leading economic indicators and the further decline in inflation seem to be making an impression” on the central bank, Joerg Kraemer, the chief economist at Commerzbank, wrote in an analyst note. The bank had “switched off autopilot.”

Even as consumer price increases have slowed in recent months, policymakers have warned that they still face a difficult challenge returning inflation to the bank’s 2 percent target.

On Wednesday, Jerome H. Powell, the Fed chair, suggested that even though there had been progress in the United States on sustainably bringing inflation down, interest rates had not been at restrictive levels long enough and that the central bank was prepared to raise rates again if needed.

In the eurozone, lower wholesale energy prices pulled down the headline rate of inflation to 5.5 percent in June, but there is still a lingering impact from higher energy bills that is spurring some sources of domestic price pressure, such as relatively strong wage growth. Core inflation in the eurozone, which strips out food and energy prices, rose to 5.5 percent last month. And there are signs that inflation will be more persistent than previously thought, policymakers have said.

“While some measures show signs of easing, underlying inflation remains high overall,” Ms. Lagarde said.

Last month, Ms. Lagarde said signs of persistent inflation meant interest rates would need to stay higher for longer, suggesting that the focus had turned to how long interest rates would remain at restrictive levels, not just how high they go.

Future policy decisions will ensure interest rates are set “at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation” to the bank’s target, according to the bank’s statement on Thursday. It will use economic and financial data to determine the “appropriate level and duration of restriction.”

By the September meeting, officials will have a significant amount of additional economic data, including two more months of inflation data and a new set of economic projections from the bank’s staff.

Europeans should see that progress is being made on inflation and that it has fallen from a peak of 10.6 percent in October, Ms. Lagarde said, but policymakers are determined to get it all the way down to target.

“Are we satisfied? Are we claiming victory? No,” she said. “We want to go to the end of the game.”