'Inflation Expected To Remain Too High For Too Long': ECB Raises Key Interest Rates By 25 Basis Points

The ECB in a statement said that inflation continues to decline but is still expected to remain too high for too long and it is determined to ensure that inflation returns to its 2 per cent target

The European Central Bank (ECB) on Thursday hiked its key interest rate by 25 basis points to fight inflation that it expects to "remain too high for too long." Following the revision the interest rate on the main refinancing operations, the interest rates on the marginal lending facility, and the deposit facility will be increased to 4.50 per cent, 4.75 per cent, and 4.00 per cent, respectively, with effect from September 20, 2023.

The ECB in a statement said, "Inflation continues to decline but is still expected to remain too high for too long. The governing council is determined to ensure that inflation returns to its 2 per cent medium-term target in a timely manner. The key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target."

According to an AFP report, the eurozone central bank has increased its lending rate for the 10th consecutive time as part of its aggressive effort, starting July last year, to combat rising inflation, which surged after Russia's invasion of Ukraine. The current hike comes despite calls for a pause to support the struggling eurozone economy, marking the longest streak of rate hikes in the central bank's history. This rate is now at its highest level since the euro was introduced in 1999.

The central bank believes that these rate increases have now reached a level that will help bring inflation back to its target. Some analysts interpret this move as a signal that the current cycle of rate hikes may be coming to an end, the report said. 

The ECB also raised its forecast for inflation this year and next. 

"The September ECB staff macroeconomic projections for the euro area see average inflation at 5.6 per cent in 2023, 3.2 per cent in 2024 and 2.1 per cent in 2025. This is an upward revision for 2023 and 2024 and a downward revision for 2025. The upward revision for 2023 and 2024 mainly reflects a higher path for energy prices," the bank said. 

It also cut the forecasts for eurozone growth over the next three years, pointing to the impact of "tightening on domestic demand and the weakening international trade environment."

According to the AFP report, recent data indicates a deteriorating economic outlook in the eurozone, with second-quarter growth at just 0.1 per cent. The EU has also lowered its GDP forecasts for 2023 and 2024, citing particular weaknesses in Germany. The eurozone has been grappling with a sluggish economy, driven by factors like an industrial slowdown, high energy costs, and reduced exports, especially to China.

The US Federal Reserve and the Bank of England are scheduled to hold their own meetings next week.