ECB Hikes Rates By 25 Bps, More Tightening Likely As Inflation Seen 'Too High'

The European Central Bank raised the three key interest rates by a quarter basis points on Thursday, in line with expectations, as policymakers assessed that despite some slowing, inflation is likely to remain “too high for too long” and economists’ are looking forward to one more hike in July.

The Governing Council, led by ECB President Christine Lagarde, increased the main refinancing rate, or refi, by 25 basis points at 4.00 percent.

The deposit facility rate was hiked to 3.50 percent and the lending rate to 4.25 percent.

The previous change in the interest rates was a similar hike in May. The ECB has raised rates in every policy session since July last year, by a cumulative 350 basis points.

Past rate increases are being transmitted forcefully to financing conditions and are gradually having an impact across the economy, the ECB said, citing a steep rise in borrowing costs and slowing loan growth.

“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 bank added.

The latest ECB Staff macroeconomic projection, out on Thursday, showed that the euro area inflation outlook was revised up further, while the growth forecasts were lowered.

Core inflation, excluding energy and food, is now projected to reach 5.1 percent in 2023, before easing to 3.0 percent next year, and further down to 2.3 percent in 2025.

Eurozone economy is now projected to grow by 0.9 percent this year, 1.5 percent next year and 1.6 percent in 2025.

“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 percent medium-term target and will be kept at those levels for as long as necessary,” the ECB reiterated.

The forward guidance suggests that in policymakers’ view, policy is still not tight enough, Capital Economics economist Jack Allen-Reynolds said.

“That’s consistent with the widely-held view that rates will rise again in July and leaves open the possibility of further hikes beyond that,” the economist added.

“It looks as if the ECB remains one of the last growth optimists standing, expecting eurozone growth to return to potential before year-end,” ING economist Carsten Brzeski said.

“This keeps the door for further rate hikes wide open.”

The Federal Reserve’s hawkish pause and a Eurozone economy not only turning out to be less resilient than anticipated but also facing a very subdued growth outlook, the ECB is increasingly taking the risk of worsening the economic outlook, Brzeski said.

The central bank confirmed that reinvestments under the asset purchase programme will be discontinued as of July 2023.

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