The European Central Bank (ECB) has raised the benchmark bank rates by 25 basis points (bps) citing that inflation was down but still remained “too high for too long.” When ECB president Christine Lagarde was pressed about cutting rates by reporters, Lagarde insisted the central bank was “not going to cut.”
ECB Boosts Interest Rates Amid Inflation Woes
The European Central Bank’s (ECB) Governing Council announced that it has raised three key ECB interest rates by 25bps on Thursday. The ECB’s move follows the U.S. Federal Reserve hiking the federal funds rate by 25bps the day prior. Similarly to the Fed’s decision, the ECB members of the Governing Council insisted that the bank looks to get annual inflation down to its 2% target. The interest rate hike will be the ECB’s 12th rate hike in a row.
“The rate increase today reflects the Governing Council’s assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission,” the ECB detailed. “The developments since the last meeting support the expectation that inflation will drop further over the remainder of the year but will stay above target for an extended period.”
The ECB hinted at pausing the rate hikes in September but when reporters pressed ECB president Christine Lagarde about when the central banks would cut rates, she insisted it wasn’t going to happen. “We are not going to cut,” Lagarde stated. The ECB’s rate hikes have had an impact on mortgage rates in the euro area, which have risen significantly since the beginning of 2022 and the ECB’s rate hikes. For instance, the average mortgage interest rate exceeded 9% in Poland in Q4 2022.
The ECB detailed on Thursday that the principal refinancing operations interest rate, along with the rates of the marginal lending facility and the deposit facility, will be elevated to 4.25%, 4.50%, and 3.75% respectively, taking effect from August 2, 2023. Following the ECB’s announcement, the euro slid against the U.S. dollar by 0.78%. Euro area yield curves also experienced a downward shift.
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