The base deposit rate is now 3.5%
The ECB confirmed the forecasts and took perhaps the penultimate step of its unprecedented monetary policy tightening campaign.
In particular, it decided on a new interest rate increase of 25 basis points, while reiterating that its future decisions on interest rates will strictly depend on the latest data that will emerge on the course of the economy amid uncertainty about inflation and growth.
The key deposit rate now stands at 3.5%, the main refinancing rate at 4% from 3.75% and the marginal funding facility rate at 4.25% from 4%, effective June 21, 2023. The market predicts another interest rate hike – most likely in July – and a peak of the key rate at 3.75%
Economists and markets have largely expected this increase, with eyes on Christine Lagarde's press conference for clues about the next moves by Frankfurt officials and where borrowing costs will peak for inflation to rise. return to the 2% target, from 61.1% now in the Eurozone.
The ECB announcement
Inflation has fallen but is forecast to remain at very high level for a very long time. The Governing Council is determined to ensure that inflation returns to its medium-term target of 2% in time. Therefore, it decided today to increase the ECB's three key interest rates by 25 basis points.
Today's rate hike reflects the Governing Council's updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. According to the June macroeconomic projections, Eurosystem experts expect headline inflation to average 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. Indicators of underlying pressures in prices remained strong, although some are showing some early signs of weakening. Experts revised upward their projections for inflation excluding energy and food, especially for this year and next, due to earlier higher-than-expected figures as well as the effects of a strong labor market on the speed of de-escalation of inflation. They now see it rising to 5.1% in 2023 and then falling to 3.0% in 2024 and 2.3% in 2025. Experts have slightly lowered their projections for economic growth for the current and next year. They now expect the economy to grow at a rate of 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.
At the same time, previous increases in interest rates decided by the Governing Council are transmitted dynamically to financing conditions and have a cascading effect on all sectors of the economy. Borrowing costs have risen sharply and loan turnover is slowing. Tighter financing conditions are the main reason why inflation is projected to fall further towards target, as these conditions are expected to further dampen demand.
Future Governing Council decisions will ensure that key ECB interest rates are set at levels that are sufficiently restrictive to achieve a timely return of inflation to the medium-term target of 2% and remain at these levels for as long as necessary. The Board will continue to take an evidence-based approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will continue to be based on its assessment of the outlook for inflation, in light of incoming economic and financial data, the dynamics of underlying inflation and the tightness with which monetary policy is transmitted. The Board confirms that it will end reinvestments under the asset purchase program (APP) from July 2023.
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