The European Central Bank has raised interest rates by 0.25 percentage points. This is the eighth consecutive increase since July 2022. ECB President Christine Lagarde has signaled a further increase in July.
The European Central Bank raised the key interest rate in the euro zone again – by 0.25 percentage points. The central rate at which commercial banks can borrow money from the ECB is now four percent. Banks use this so-called prime refinancing rate as the basis for loans, such as private construction loans.
With the new hike, the ECB raised its key interest rate for the eighth time in a row since July 2022. The development is believed to be the fastest funding cycle in its history. The so-called deposit rate for banks that “park” their funds with the ECB also rose to 3.50% from 3.25%.
“Not yet at the destination”
The European Central Bank is likely to raise its key interest rate again next month, according to ECB President Christine Lagarde. “It’s very likely that we will raise rates again in July,” she told a news conference. “That’s because we are determined to meet our target on time,” she added, referring to the 2 percent target inflation rate. “Is it done? Is our journey over? No, we’re not there yet.”
The latest data show that inflation in the euro zone is still far from the European Central Bank’s target. In May, the inflation rate dropped significantly to 6.1%. However, it should still be 5.4% for the full year of 2023. Growth is forecast to be 3 percent next year and just 2.2 percent in 2025.
Lagarde is currently describing the labor market and wages as the main drivers of inflation. The central bank chief has previously described the European labor market as a source of economic strength.
Credit demand falls
Higher interest rates are seen as a means of offsetting inflation because they dampen demand and, over time, price increases. At the same time, rising interest rates can hold back economic growth. A significant decline in the demand for credit by households and firms can already be observed.
On Wednesday, the Fed took a break after raising rates 10 times in a row. It left the base rate unchanged for the first time since its most recent hike in March 2022, keeping the rate at a range of 5.0% to 5.25%. In the US, inflation has fallen to 4% in May compared to the same month last year.
weak growth expected
“We haven’t considered a break,” ECB President Christine Lagarde said today. She declined to comment on a possible rate summit. From the monetary watchdog’s point of view, the economic outlook for the euro area remains cloudy for the time being: “Growth is likely to remain subdued in the short term.”
Over the course of the year, however, things will get brighter. The reason is lower expected inflation and further reduction of delivery bottlenecks.