ECB Raises Interest Rate to Record 4.5% in Fight Against Inflation
The European Central Bank (ECB) has raised its main interest rate for the 10th consecutive time as it prioritizes the battle against inflation over a weakening economy. The rate has now climbed from -0.5% in June 2022 to a record 4.5%. The decision was influenced by revised macroeconomic projections for the euro area, showing higher inflation at 5.6% this year and 3.2% next year. However, the ECB adjusted its medium-term forecast slightly downward to 2.1%.
The ECB suggested that further rate hikes may not be immediate, stating that the current rates would contribute significantly to combating inflation.
This move also increased interest rates on the ECB’s main refinancing operations and marginal lending facility to 4.5% and 4.75%, respectively. Economic growth projections for the euro area were lowered for 2023, 2024, and 2025.
While there was uncertainty leading up to this meeting, the majority of governors agreed with the decision. ECB President Christine Lagarde emphasized that future rate decisions would be data-dependent. Headline inflation in the euro area was 5.3% in August, with Germany facing a deteriorating economy. Euro zone business activity also declined to its lowest level since November 2020 in August.
Market focus is now on the ECB’s statement language, especially the 2025 inflation forecast and the mention of rates being maintained for a “sufficiently long duration,” indicating a flat path for some time to come.