ECB Raises Interest Rate to Record 4.5% in Fight Against Inflation

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.

Hey! Good post in general but I believe that they’re a few things wrong here. First of all you say that the majority of the GC agreed. When it’s not the case. In the press conference Lagarde stated the opposite. Another thing is the last paragraph, the 2025 projections. Trust me, the market couldn’t care less of the ECB’s projections on 2025 - because all their long-term forecasts are so wrong… the market now literally ignores them.

Additionally, IMO, you are focusing on the wrong rates, the one that matters for the economy is the deposit facility (now 4%) which is the one the banks get paid for parking their money in the ECB. Plus, while it’s technically true that Lagarde stated that this “hawkish pause” doesn’t imply peak rates; it’s fairly obvious that this is a pause. Just look at market reaction and data being released in EZ.