ECB Raises Interest Rates To 22-Year High To Fight Inflation Amid Stagnant Growth

The central bank of erouzone has projected that inflation will remain above its 2 per cent target until 2025. It hinted at the possibility of further interest rate increases.

ECB President Christine Lagarde said more hikes, including at the bank's next meeting on July 27, are in the cards.

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The European Central Bank on Thursday decided to raise the interest rate to its highest level in 22 years. The ECB increased its key interest rate for the eighth consecutive time, by 25 basis points to 3.5 per cent, its highest level since 2001. Further, the EU zone central bank has indicated another rate hike in the future to fight high inflation eavan as many economies in the 27-nation block have been struggling. 

"The Governing Council decided to raise the three key ECB interest rates by 25 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 4.00 per cent, 4.25 per cent and 3.50 per cent respectively, with effect from 21 June 2023," ECB said in its release. 

We raised interest rates by 0.25 percentage points.

See our latest monetary policy decisions https://t.co/JW3z8IFf5C pic.twitter.com/q8xYoge8ec

— European Central Bank (@ecb) June 15, 2023

The central bank governing the 20 countries of erouzone has projected that inflation will remain above its 2 per cent target until 2025. Additionally, it hinted at the possibility of further interest rate increases in the upcoming months.

"Future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2 per cent medium-term target and will be kept at those levels for as long as necessary," the ECB said.

ECB President Christine Lagarde said more hikes, including at the bank's next meeting on July 27, are in the cards.

"Are we done? Have we finished the journey? No, we're not at the destination. Do we still have ground to cover? Yes, we have ground to cover," she said at a news conference.

According to a report by Reuters, the eurozone is experiencing stagnating growth, however, inflation has been gradually decreasing due to lower energy prices. However, despite this, inflation in the eurozone remains unacceptably high for the ECB at 6.1 per cent.

President Christine @Lagarde introduces the inflation outlook for the euro area pic.twitter.com/ToaMC5cpwh

— European Central Bank (@ecb) June 15, 2023

Underlying price growth, which typically excludes food and energy, has only recently begun to show signs of slowing down, the report said. 

On Wednesday, the US Federal Reserve broke its own string of 10 successive rate hikes and kept the interest rate unchanged. According to the report, this sent a signal to investors that the current tightening cycle across developed economies is nearing an end, even if a little more US tightening is still possible.

However, the ECA statement said, "Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation."

The ECB has also revised its inflation forecasts upward for 2023, 2024, and 2025, indicating that inflation is likely to exceed the central bank's target of 2.2 per cent. According to the news agency, while such projections would typically suggest a potential pause in policy tightening, the ECB has become cautious about relying too heavily on its own forecasts due to past instances of them being inaccurate.

Instead, rate-setters have focused on actual economic data that have been painting a mixed picture.

According to the report, Germany experienced two consecutive quarters of contraction, leading to a mild recession in the region last winter. The economy is expected to achieve only modest growth this year. However, unemployment is at record lows and wage growth is gradually increasing.

While headline inflation has been declining rapidly since reaching double digits last year, underlying prices, particularly for services, have not yet displayed a significant decrease that would prompt ECB policymakers to ease monetary measures, the report further said. 

"The Governing Council’s past rate increases are being transmitted forcefully to financing conditions and are gradually having an impact across the economy," the ECB said in the statement.