The European Central Bank (ECB) has raised its key interest rates by 25 basis points, marking a slower pace than previous increases. Despite this, future rate hikes may still be expected as inflation in the euro area remains persistently high, and the regulator has insisted it will continue to seek a “timely return” to its 2% inflation target. ECB president Christine Lagarde has stated that rates are not “sufficiently restrictive” yet, indicating that more measures may be taken if necessary.
The Governing Council of the European Central Bank decided to raise the interest rates for its main refinancing operations, marginal lending facility, and deposit facility by 25 basis points on Thursday, May 10, 2023. This increase is smaller than previous hikes that started in July 2022. While slowing the rate hikes, the regulator stated that they will continue to prioritize ensuring “a timely return of inflation to the 2% medium-term target” and that “sufficiently restrictive” levels will be maintained “for as long as necessary.”
In its press release after the council’s meeting, the regulator said that it considers the inflation outlook to be “too high for too long.” The announcement reflects that although headline inflation has declined over recent months, underlying price pressures in the economy remain strong.
The ECB’s decision to slow down its rate hikes follows the US Federal Reserve’s decision to increase its benchmark interest rate by the same 25 basis points on Wednesday. However, ECB President Christine Lagarde made it clear that European interest rates are not yet “sufficiently restrictive” to bring inflation down. Speaking at a press conference after the Governing Council’s meeting in Frankfurt, she stated, “We are not pausing — that is very clear. We know that we have more ground to cover.” She clarified that the ECB is “not Fed-dependent” and dismissed the notion that if the US pauses its rate hikes, the eurozone’s monetary policy regulator would have to do the same.
Lagarde highlighted the “significant upside risks” to inflation that remain in the eurozone, admitting that some governors favored a bigger rate hike. This suggests that, given the current economic situation and unstable inflation environment, the ECB may have to implement rate hikes in the future.
The ECB’s decision may impact businesses, investors, and individuals in the eurozone. Higher interest rates will increase borrowing costs, which may make it more difficult for businesses to grow and invest. This may also affect individuals with variable rate mortgages or loans where the interest rate could rise after the ECB increased rates. In general, higher interest rates would act to slow down economic growth, but in a situation where inflation remains a significant concern, they can be an effective tool to contain it.
Overall, the ECB’s decision to raise interest rates by 25 basis points is a response to the rising inflation in Europe, which has exceeded the bank’s 2% target for an extended period. While this current hike is smaller than previous ones, the regulator remains vigilant about inflation and the potential consequences of not addressing it swiftly. The ECB’s commitment to maintaining “sufficiently restrictive” rates for “as long as necessary” suggests that more measures may be taken if inflation remains elevated, and the economy faces additional risks.