FameEX Hot Topics | ECB Increases Interest Rates by 25bps Despite High Inflation, No Break Expected, Says Lagarde

The European Central Bank (ECB) has raised its key interest rates by 25 basis points, slowing the pace of the previous increases. However, with inflation in the euro area remaining persistently high, future rate hikes may still be expected, with the regulator insisting that 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.

The Governing Council of the European Central Bank (ECB) decided to raise three key interest rates by 25 basis points (bps) on Thursday. While slowing the rate hikes, the monetary authority indicated that future increases are possible as its fight to tame inflation goes on. “The inflation outlook continues to be too high for too long,” the regulator highlighted in a press release after the council’s meeting. It explained that while headline inflation has declined over recent months, underlying price pressures remain strong.

The interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility will be increased to 3.75%, 4.00% and 3.25% respectively, from May 10, 2023, the announcement detailed. The 25 bps raise to the policy rates is the smallest since hiking began in July 2022.
At the same time, the ECB emphasized that the council’s future decisions will aim to ensure that “a timely return of inflation to the 2% medium-term target” is achieved. It also said that the “sufficiently restrictive” levels will be maintained “for as long as necessary.”

ECB president, Christine Lagarde, insisted that the ECB is not pausing and that there is more ground to cover. The slowdown in Europe follows the U.S. Federal Reserve’s decision to increase its benchmark interest rate by the same 25bps on Wednesday. Analysts have interpreted the accompanying statements as hinting that this may be the last in the Fed’s own series of hikes.

The ECB's move aims to cool rising inflation that has been triggered by a combination of supply-chain issues and a surge in demand as economies reopen from the COVID-19 pandemic. The persistent rise in inflation has made it challenging for central banks worldwide to balance economic growth with price stability. The ECB’s latest decision is in line with many other central banks around the world that have been increasing interest rates in response to the inflationary pressure.

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