Interest rate rises to 4 percent
ECB raises interest rates for the eighth time in a row
06/15/2023, 2:19 p.m
In the fight against high inflation, the European Central Bank (ECB) is raising interest rates again by 0.25 percentage points. The key interest rate will thus rise to 4.0 percent. The monetary watchdogs are slightly reducing the growth prospects.
The ECB is continuing its rate hike course in the fight against inflation by raising key rates again. As in May, the currency watchdogs led by ECB President Christine Lagarde decided to raise interest rates by 0.25 percentage points. This is the eighth increase in a row since the central bank switched to tightening last summer after years of ultra-loose monetary policy. At the same time, the central bank is now assuming lower economic growth in this and the coming years. The ECB gave no clear indication of possible further rate hikes.
The deposit rate, which sets the trend on the financial markets and which financial institutions receive from the central bank for parking excess funds, will be 3.50 percent in the future – the highest level for 22 years. The key interest rate, i.e. the rate at which commercial banks can borrow money from the ECB, has risen to 4.0 percent. The ECB also announced that the future decisions of the Governing Council will ensure that key interest rates are brought to a sufficiently restrictive level. This should allow for a timely return of inflation to the medium-term two percent target.
Fight against inflation continues
The euro watchdogs have thus raised key rates by a total of 4.00 percentage points since last summer. However, the work of the European Central Bank (ECB) in the fight against inflation in the 20-country community is probably not over yet, although economists estimate that the peak in interest rates is getting closer. At 6.1 percent in May, inflation was still well above the two percent target set by the central bank. The much-noticed core rate, which excludes the volatile energy and commodity prices, is only slowly beginning to weaken. At 5.3 percent in May, it is also still far too high. The core rate is considered a good indicator of underlying inflation trends and is therefore closely monitored by policymakers.
The economic situation is not easy for the monetary authorities. This year, the central bank is expecting slightly lower economic growth and higher inflation in the euro zone than expected three months ago. The central bank expects an average inflation rate of 5.4 percent this year. In its March forecast, the ECB assumed 5.3 percent. For 2024, she predicts an inflation rate of 3.0 percent (March forecast 2.9 percent). A rate of 2.2 percent (2.1 percent) is expected for 2025. According to the latest ECB forecast, the economy in the euro zone will grow by 0.9 percent this year, somewhat weaker than the 1.0 percent predicted in March.
On the other side of the Atlantic, the US Federal Reserve has taken a break after ten interest rate hikes in a row. However, the Fed indicated that it is considering up to two smaller moves this year.