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FameEX Hot Topics | ECB Raises Interest Rates by 25 Basis Points Despite Inflation Concerns, No Pause Planned, Says Lagarde

2023-05-05 15:57:05

The European Central Bank (ECB) has raised its key interest rates by 25 basis points, but at a slower pace than previous increases. Despite this, the regulator insists that future rate hikes may still be expected, as inflation in the euro area remains persistently high. The ECB aims to seek a “timely return” to its 2% inflation target, and ECB president Christine Lagarde has stated that rates are not “sufficiently restrictive” yet. The move comes after the US Federal Reserve raised its benchmark interest rate by the same 25bps on Wednesday. The ECB's decision aims to cool the rising inflation that has been triggered by a combination of supply-chain issues and a surge in demand as economies reopen from the COVID-19 pandemic.

The Governing Council of the European Central Bank (ECB) decided to raise three key interest rates by 25bps on Thursday. The monetary authority indicated that future increases are possible as its fight to tame inflation goes on. 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 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 25bps 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.” ECB president Christine Lagarde insisted that the ECB is not pausing and that there is more ground to cover.

The persistent rise in inflation has made it challenging for central banks worldwide to balance economic growth with price stability. The ECB’s latest decision is in line with many other central banks around the world that have been increasing interest rates in response to inflationary pressure. While the rate hikes have been slowed, the ECB’s message has been clear that more action may be needed in the future.

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