Durrant Pate/Contributor

The Governing Council of the European Central Bank (ECB) has raised its key interest rates by 25 basis points.

As a result, starting Wednesday (May 10), interest rates on the ECB’s main refinancing operations, the marginal lending facility and the deposit facility will all hiked to 3.75 per cent, 4 per cent, and 3.25 per cent, respectively. The decision was made today after the ECB’s Governing Council meeting.

In arriving at its decision, the Governing Council acknowledged that, “headline inflation has declined over recent months but underlying price pressures remain strong.”

At the same time, the Governing Council observed that “past rate increases are being transmitted forcefully to Euro Area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain”.

High inflation pressures

Considering the ongoing high inflation pressures, the Governing Council expects to raise interest rates further, as the inflation outlook continues to be too high for too long. It is the considered view of the Governing Council that keeping interest rates at restrictive levels will over time reduce inflation and ensure it reaches its medium-term target of 2 per cent in a timely manner.

To preserve price stability and financial stability in the Euro Area, the Governing Council is monitoring current market tensions closely and stands ready to respond as necessary.

According to the ECB, “the Governing Council’s policy rate decisions will continue to be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.”

The ECB remarked that its policy toolkit is fully equipped to provide liquidity support to the Euro Area financial system if needed.

“Moreover, the Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate,” the ECB concluded.

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