25 basis points hike took effect today

The Governing Council of the European Central Bank (ECB) has taken the decision to raise its three key interest rates. 

The hike in interest rates, which was announced today (June 15, 2023) will see them going up by 25 basis points. As a result, starting June 21, 2023, the interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility will all be raised to 4.00%, 4.25%, and 3.50%, respectively.

The increase in the rate follows the updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission by the Governing Council. The June macroeconomic projections show headline inflation averaging 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. 

The ECB reports, “Indicators of underlying price pressures remain strong, although some show tentative signs of softening. Staff have revised their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation.” 

Economic growth projections lowered

They now see it reaching 5.1% in 2023 before it declines to 3.0% in 2024 and 2.3% in 2025. Staff have slightly lowered their economic growth projections for this year and next year. They now expect the economy to grow by 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.

According to the ECB, “the Governing Council’s past rate increases are being transmitted forcefully to financing conditions and are gradually having an impact across the economy. Borrowing costs have increased steeply and growth in loans is slowing. Tighter financing conditions are a key reason why inflation is projected to decline further towards the target, as they are expected to increasingly dampen demand.”

The ECB has declared that its Governing Council stands ready to adjust all its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission.