In what might have been the closest decision in the European Central Bank’s quarter-century history, its governing council decided on a tenth consecutive increase of its official deposit rate to 4 per cent. It will probably be its last this cycle. The accompanying statement, which president Christine Lagarde cited at least twice in her post-meeting briefing, concluded that interest rates have reached levels that “will make a substantial contribution to the timely return of inflation to the target”.

The policymakers’ bind is that the increase could also make a substantial contribution to the slowing euro economy. ECB economists lowered growth estimates substantially through 2025, although even these reduced forecasts look way too optimistic. Inflation, however, was seen accelerating more than previously expected this year and next, and although there was a modest trimming of 2025’s core forecast, price increases will remain above the bank’s 2 per cent target.

This could be seen as the last hurrah of the hawks, and the recent rise of crude oil over $90 a barrel may have further helped swing the balance. The prospect of another increase in the benchmark rate later this year is still technically alive, but it may not survive for much longer. With euro money supply turning negative, the risks now are that the ECB has blundered straight into a stagflationary trap. The memory of 2011 still resonates when the Jean-Claude Trichet-led ECB raised rates twice, ignoring the ramifications from the global financial crisis, and precipitating a deep downturn in the euro economy.

The euro fell against the dollar by 0.7 per cent to its lowest level since May, and ten-year German bund yields fell — an unusual reaction when a central bank hikes. That is because market expectations are rapidly shifting to this being the last of the ECB’s 14-month hiking cycle as recession becomes more likely. Notably, the governing council did not decide to increase its quantitative tightening measures or other monetary stimulus reduction. Lagarde tried hard to emphasise the subtleties in the official statement and maintain a hawkish bias. But market pricing is already looking through the ECB’s inflation forecasts — which proved faulty in predicting the post-pandemic surge. Indeed, 4 per cent is a round number but it may prove one step too far for the euro economy to stay out of recession.

• Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London