Illustrative photo – Euro logo in front of the European Central Bank building in Frankfurt am Main.
Frankfurt/Prague – Today, the European Central Bank (ECB) raised its key interest rate by half a percentage point to 3.50 percent despite turbulent financial markets. By tightening monetary policy, they are trying to get inflation under control. The ECB also said in its announcement today that the Governing Council is closely monitoring the current market tensions and stands ready to respond to support price and financial stability in the euro area. But he no longer states that he intends to continue raising interest rates significantly.
The Board of Governors raised rates for the sixth time in a row. The deposit rate also increased by half a point and is at three percent. It reached the highest level since the end of 2008.
The ECB also lowered its inflation forecast for this year and next. According to her, the inflation rate should average 5.3 percent this year, 2.9 percent next year, and fall to 2.1 percent in 2025. Until 2025, inflation should thus exceed the ECB's two percent inflation target. The central bank added that it made these projections before the current turbulence in the markets.
“At this point, it is not yet possible to say what the next path will look like,” ECB President Christine Lagarde said when asked by reporters about the next rate hike. She emphasized that a data-driven approach to the Governing Council's decision-making on interest rates is now even more important. “We are determined to bring inflation back to two percent in the medium term,” the ECB head said, assuring that the decision on interest rates found a large majority in the Governing Council “with three or four (members) who did not support it”. The Governing Council has 26 members .
The ECB started raising interest rates last July. At that time, it raised the base rate from a record low of zero percent, at which it had been kept since 2016. In September and October, it increased the base rate by 0.75 percentage points. In December, it slowed its rate of hikes to 0.5 percentage points for the first time as it believed inflation was close to peaking.
Many economists expected the ECB to continue raising interest rates sharply, despite uncertainty in the banking sector after the collapse of two American banks and despite concerns about the large Swiss bank Credit Suisse. “The banking sector in the euro area is resilient, with strong capital and liquidity positions,” the ECB said today, however.
“In our opinion, the ECB is currently more concerned about unrelenting inflationary pressures than possible banking contagion, which is why it has remained true to its February statement that it plans to raise interest rates by exactly 0.5 percentage points in March,” analysts from the Ebury company told ČTK. According to them, the cycle of monetary policy tightening in the Eurozone is not over, and the key interest rate will rise higher this year than the markets currently expect in response to recent events.
In the medium term, the ECB aims for the inflation rate in the Eurozone to hovered around two percent. But this value has been moving away from it for months. Inflation in the Eurozone is slowing down, but in February, according to a quick estimate by the statistical office Eurostat, it was 8.5 percent and was higher than expected.
On the contrary, the US central bank (Fed) moderated the extent of interest rate increases at the beginning of February, as expected . It increased the base interest rate by a quarter of a percentage point to a range of 4.50 to 4.75 percent. The rate is thus the highest since October 2007.
The euro weakened after the announcement of the new rate level, but when Lagarde took office, it started to strengthen. Eurozone government bond yields headed higher.