The European central bank announced on Thursday that it was raising its key rate by 25 basis points to 3.5%, deviating from the US central bank’s decision to suspend its own hikes on Wednesday.
The central bank raised rates from July 2022 in a bid to reduce record high inflation across the region. The latest inflation data showed this prices are cooling at a faster-than-expected pace, with headline inflation reaching 6.1% and core inflation – excluding volatile items – 5.3% in May. This remains well above the ECB’s target of 2% headline inflation.
While markets had widely expected Thursday’s decision, investors say much uncertainty remains about what the ECB might do after the summer.
“The Governing Council’s future decisions will ensure that the ECB’s key interest rates are adjusted to sufficiently restrictive levels to achieve a timely return of inflation to the 2% medium-term objective and will be maintained at these levels for as long as necessary,” the ECB said in a statement .
Despite the recent cooling in inflation, the ECB has actually raised its headline and headline expectations for this year and next. It now expects headline inflation to be 5.4% this year, 3% in 2024 and 2.2% in 2025.
The ECB also took a more negative view of growth in the coming years, revising growth figures to 0.9% this year and 1.5% in 2024. An estimate three months ago showed GDP growth at 1% this year and 1. 6%. in 2024.
The euro turned higher against the US dollar, while European bond yields rose after the announcement.
The ECB’s latest announcement followed the states’ decision on Wednesday The Federal Reserve will keep rates unchanged. Chairman Jerome Powell said policymakers need more information to determine next steps, but the central bank expects another two-quarters of a percentage point over the course of the year.
At a news conference after the decision, ECB President Christine Lagarde said: “We are not thinking about a suspension.”
“Are we done? Have we finished the journey? No, we’re not there.” [the] destination,” she said, pointing to at least one more potential rate hike in July.
The European Central Bank raised interest rates by another quarter of a percentage point and announced a worsening of the economic outlook.
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Lagarde also said the central bank was not “satisfied” with the inflation outlook. But she wanted to preempt further decisions, adding that “the final rate is something that we [will] know when we get there.”
Market players were wondering if the ECB would end this rate hike cycle when its deposit rate was at 3.75 or 4%.
Dates published earlier this month showed that the 20-nation region entered a technical recession in the first quarter of this year. Gross domestic product came in at -0.1% in the three months to March, after falling 0.1% in the final quarter of 2022.
Poor economic performance could limit the ECB’s ability to raise rates further to curb inflation. However, ECB officials have previously indicated that it is more important to reduce prices than to avoid an economic slowdown.