(Bloomberg) -- The European Central Bank raised interest rates for the 10th consecutive time as President Christine Lagarde signaled a shift in gear that could mean the peak has been reached.

While economists and investors now see the 4% level set on Thursday as the high point for borrowing costs in the current tightening cycle, the ECB chief insisted that she can’t yet say if that’s the case.

“With today’s decision, we have made sufficient contributions, under the current assessment, to returning inflation to target in a timely manner,” Lagarde told reporters in Frankfurt. “The focus is probably going to move a bit more to the duration, but it is not to say — because we can’t say — that now that we are at peak.”

The euro fell as much as 0.7% to $1.0656 — the weakest since May — and bonds rallied as traders now see around a 20% chance of another hike, reflecting growing concern over the region’s growth outlook.

Italian debt, among the most sensitive to changes in interest rates, led the advance. The yield on 10-year bonds dropped 12 basis points to 4.32%, set for the biggest decline in three weeks.

A “solid majority” of policymakers supported the outcome, according to the president, who acknowledged that some colleagues would have preferred a pause instead. Before the meeting, officials acknowledged that the decision was the most finely balanced since the ECB began tightening in July 2022.

The Governing Council repeated language that it will keep borrowing costs at “sufficiently restrictive levels for as long as necessary.” That could keep the door open to further hikes should inflation prove more sticky than thought.

What Bloomberg Economics Says...

“Committing to this being the peak doesn’t make strategic sense for Lagarde. The hawks would object and she doesn’t have a crystal ball. While unlikely, if inflation were to significantly surprise to the upside, the ECB could yet be forced to do more.”

—David Powell and Jamie Rush. For full report, click here

Meanwhile Lagarde was at pains to insist that the prospect of a future cut in borrowing costs “was not even a word that we have pronounced.”

The outcome on Thursday means yet more restriction on euro-zone activity to squeeze out persisting price growth, dealing another blow to expansion that was already languishing.

It suggests a trade-off among policymakers where they accepted the need to inflict additional pain on the economy to bring inflation under control.

“Inflation has declined, and we want it to continue to decline,” Lagarde said. “We’re doing that not because we want to force a recession, but because we want price stability.”

Economists and investors struggled to anticipate the result, ever since a speech by Lagarde last month overtly avoided any signal of her intentions for the decision. 

Bets in favor of a hike grew as the weeks went by, encouraged along the way by Dutch official Klaas Knot’s warning that markets could be underestimating the chance of more action.

New forecasts by ECB staff presented on Thursday were a key source of input for the decision. Lagarde said that the economy will stay “subdued” in coming months. 

“We are clearly in a period of slow and sluggish growth,” she said. “The difficult times are now.”

The new outlook shows markedly softer annual economic expansion through 2025, while inflation will weaken to average 3.2% in 2024 and then 2.1% in the final year of that outlook. 

Underlying consumer-price growth will be a touch stronger at the end of the horizon, averaging 2.2% in 2025. 

The decision is the first of several across developed economies over the coming days. The Federal Reserve is meeting next Wednesday as policymakers there become more optimistic they can tackle inflation without causing much economic damage. 

The Bank of England, the Swiss National Bank and central banks in Sweden and Norway will set policy a day later. 

ECB officials have lately embraced a message of prolonged constriction, playing down the prospect that rates will be lowered anytime soon. Bundesbank President Joachim Nagel said this month that it would be “wrong to speculate” on rapid cuts.

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When policymakers last hiked borrowing costs in July, they left the path ahead deliberately open to assess a raft of new economic data over the summer. 

The picture since then of slowing growth amid stubborn price pressures appeared to point to the possibility of stagflation materializing, reminiscent of the curse it inflicted on advanced economies during the 1970s.

Core inflation, which strips out volatile items like energy and food, has barely budged in recent months and was at 5.3% in August. Euro-zone growth for the second quarter was revised lower and business surveys signaled worsening prospects for the 20-nation bloc. 

The decision is likely to have been hard-fought, with all the indications beforehand pointing to the meeting itself as crucial in achieving a consensus. 

Hawkish officials including Nagel and Latvia’s Martins Kazaks had signaled support for another hike, while dovish colleagues such as Italy’s Ignazio Visco cautioned against overdoing tightening because of “delayed effects.” 

Bank of France Governor Francois Villeroy de Galhau, for his part, played down the importance of the level at which rates will settle, insisting that what matters more is how long they will stay there.

--With assistance from James Regan, Bastian Benrath, Aaron Eglitis, Rosalind Mathieson, Milda Seputyte, Barbara Sladkowska, Joel Rinneby, Harumi Ichikura, Alonso Soto, Andrew Langley, Christoph Rauwald, Angela Cullen, Laura Malsch, Alexey Anishchuk, Alessandra Migliaccio, Constantine Courcoulas, William Horobin, Alice Atkins and Greg Ritchie.

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