Global inflation is on the decline, but is still expected to remain somewhat high for some time. As such, the Governing Council of the European Central Bank (ECB) has decided to raise the three key ECB interest rates by 25 basis points in order to work towards the goal of ensuring that inflation returns to its 2% medium-term target as soon as possible.
The September ECB staff macroeconomic projections for the euro area see average inflation at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025. Financing conditions have continued to tighten as demand remains muted, which highlights the imperative of bringing inflation back to target.
As a result, of this continued weakening of domestic and international trade, the ECB staff have lowered their economic growth projections and now only now expect the euro area economy to expand by 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025.
Based on the current state of the economy, the Governing Council considers that the key ECB interest rates have attained levels that, if maintained for long enough, will contribute greatly to bringing inflation back in line with target levels in a timely manner. The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.
The Governing Council is determined to continue its data-dependent decision making. In particular, its interest rate decisions will be based on the monitored inflation outlook in light of the incoming economic and financial data.
Key ECB interest rates
The Governing Council decided to raise the three key ECB interest rates by 25 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 4.50%, 4.75% and 4.00% respectively, effective 20 September 2023.
According to reporting by Reuters, ECB President Christine Lagarde did not completely rule out additional interest hikes if needed and said interest rates would have to remain at restrictive levels for some time.
“The focus is going to move, going forwards, to the duration, but that is not to say, because we can’t say that now, that we are at peak,” she said during a recent press conference.
Reuters reported that the president acknowledged that some ECB board members did not even want to raise rates. However, there appears to be a solid majority of governors that agree with the decision the ECB has made.
As it stands, the Governing Council currently stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium-term and to ensure that current monetary policies are carried out smoothly.
