ECB raises interest rates by 25 bps to 4%

June 15, 2023 (MLN): European Central Bank (ECB) on Thursday increased the benchmark refinancing interest rate by 25 basis points to 3.75%-4%.

The Governing Council decided to raise all three key ECB interest rates by 25 basis points.

Accordingly, the interest rates on the marginal lending facility and the deposit facility will also be increased to 4.25% and 3.50% respectively, with effect from June 21, 2023, along with the main benchmark refinancing rate.

Inflation has been coming down but is projected to remain too high for too long, the Governing Council stated that it is determined to ensure that inflation returns to its 2% medium-term target in a timely manner, said the monetary policy decision statement issued today.

The rate increase today reflects the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission.

According to the June macroeconomic projections, Eurosystem staff expect headline inflation to average 5.4% in 2023, 3% in 2024, and 2.2% in 2025.

Indicators of underlying price pressures remain strong, although some show tentative signs of softening. 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 labor market for the speed of disinflation, it reads.

They now see it reaching 5.1% in 2023, before it declines to 3.0% in 2024 and 2.3% in 2025. Staff have slightly lowered their economic growth projections for this year and next year. They now expect the economy to grow by 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025, it further added.

At the same time, the Governing Council’s past rate increases are being transmitted forcefully to financing conditions and are gradually having an impact across the economy.

Borrowing costs have increased steeply and growth in loans is slowing. Tighter financing conditions are a key reason why inflation is projected to decline further towards target, as they are expected to increasingly dampen demand.

The Governing Council’s 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% medium-term target and will be kept at those levels for as long as necessary.

The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.

In particular, its interest rate decisions will continue to be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission, it stated.

This hike came largely in line with the market’s expectations, wherein the market participants were expecting a 25 bps hike, despite yesterday's U.S. Fed decision to pause rates.

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