European Central Bank raises rates by 25 basis points, inflation outlook still ‘too high for too long’

The European Central Bank (ECB) raised interest rates by 25 basis points on Thursday (today). The interest rate on the main refinancing operations, the marginal lending facility, and the deposit facility will go up to 3.75 per cent, four per cent and 3.25 per cent respectively with effect from 10th May 2023. Parallel to this, the ECB governing council will keep unwinding the asset purchase programme (APP) at a “measured and predictable pace.”

The ECB emphasized in its press release that the inflation outlook continues to be “too high for too long.” The raise is thus in line with its policy to restore the inflation rate back to two per cent – a level considered best to maintain price stability. 

“We are not pausing – that is very clear,” ECB President Christine Lagarde told a press conference. “We know that we have more ground to cover.”

In its Winter 2023 interim economic forecast published on February 2023 the European Commission had lowered projections for inflation  to 5.6 per cent for the Euro Area yet Eurostat data showed  that as of 2nd May 2023 inflation was still hovering at around seven per cent.

This raise forms part of a series of a larger-than-usual upward adjustments that started on 22nd July 2022.  Back then, the ECB decided to push up the main rate from -0.5 per cent to zero per cent citing “very high energy prices” as the main reason. Supply bottlenecks, higher demand and a lower exchange rate also contributed to this as they brought about a higher level of uncertainty across many parts of the Eurozone.

The ECB noted that “the past rate increases are being transmitted forcefully to euro area financing and monetary conditions,” however it also acknowledged that “the lags and strength of transmission to the real economy remain uncertain.”