Image: DANIEL ROLAND (AFP)
ECB boss Christine Lagarde also promised further increases. However, there were also increasing warnings that the ongoing tightening of monetary policy would have a negative impact on economic growth.
The key interest rate, i.e. the rate at which commercial banks can borrow money from the ECB, has now risen to 4.0 percent. The ECB also increased the other two interest rates by 0.25 points to 4.25 percent and 3.5 percent respectively. These are the interest rates for the marginal lending facility for short-term procurement of money and for the deposit facility when banks deposit their money with the ECB.
“Inflation has fallen but is likely to remain too high for too long,” the ECB said. “Indicators of underlying price pressures remain strong, albeit showing some early signs of moderation.” Inflation in the euro zone fell noticeably to 6.1 percent in May. However, the inflation rate had even risen slightly in April, rising from 6.9 percent in March to 7.0 percent.
The ECB now referred to “past upside surprises” and the impact of the robust labor market. When unemployment is low, wages tend to rise, which in turn can fuel price increases. The ECB experts therefore corrected their inflation forecast slightly upwards. For this year, the ECB had assumed 5.3 percent in its March forecast, now it is 5.4 percent. For 2024, she predicts an inflation rate of 3.0 percent (March forecast 2.9 percent). A rate of 2.2 (2.1) percent is expected for 2025.
The rate hike had been expected by market observers. Therefore, indications of the further course of the ECB were eagerly awaited. The US Federal Reserve (Fed) suspended interest rates for the first time on Wednesday after ten consecutive interest rate hikes. It left the key interest rate unchanged for the first time since the beginning of March 2022.
No thought of a break
“We’re not thinking about a break,” Lagarde said. As long as there are no significant changes in assumptions about future developments, the central bank will continue raising interest rates in July. The ECB is “not done yet” with its efforts to lower inflation.
Higher interest rates are seen as a remedy against inflation – but they also act as a brake on economic growth. The ECB has now revised its expectations for economic growth in this and the coming years downwards by 0.1 percentage points. According to the latest ECB forecast, the economy in the euro area will grow by 0.9 percent this year and thus somewhat weaker than the 1.0 percent predicted in March. In the coming year, GDP is expected to increase by 1.5 (1.6) percent. For 2025, unchanged growth in economic output of 1.6 percent is expected compared to the March projection.
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