The European Central Bank (ECB) raised its key interest rates by 25 basis points, slowing the pace from previous increases. However, as inflation in the euro area remains persistently high, future rate hikes may still be expected with the regulator insisting it will continue to seek a “timely return” to its 2% inflation target and ECB president Christine Lagarde stating that rates are not “ sufficiently restrictive” yet.
ECB Eases Pace of Hiking Interest Rates in the Eurozone
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.”
‘We Are Not Pausing, We Have More Ground to Cover,’ ECB’s Lagarde Insists
The slowdown in Europe follows the US Federal Reserve’s decision to increase its benchmark interest rate by the same 25bps on Wednesday, with analysts interpreting the accompanying statements as hinting that this may be the last in the Fed’s own series of hikes.
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.
Quoted by Reuters, she insisted that the ECB is “not Fed-dependent,” dismissing the notion that if the US pauses its rate hikes, the eurozone’s monetary policy regulator would have to do the same. She highlighted the “significant upside risks” to inflation that remain in the common currency area and admitted that some governors were favoring a bigger rate hike.
What are your forecasts for the ECB’s next policy decisions on interest rates? Share them in the comments section below.
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