European Central Bank raising interest rates by 0.5 percentage points again

European Central Bank (ECB) President Christine Lagarde at the Bank of Estonia. November 2022.
European Central Bank (ECB) President Christine Lagarde at the Bank of Estonia. November 2022. Source: Ken Mürk/ERR

Delivering on a promise made alongside the latest hike last month, the European Central Bank (ECB) is raising three key interest rates by another 0.5 percentage points next week, it announced Thursday, bringing the interest rate on the central bank's deposit facility to 3 percent starting March 22.

The ECB's Governing Council decided to raise three key interest rates by 0.5 percentage points from next Wednesday, bringing the interest rate on the bank's main refinancing operations to 3.5 percent, the interest rate on its marginal lending facility to 3.75 percent and the interest rate on its deposit facility to 3 percent, the euro area's central bank said in a press release.

The ECB justified the move with the fact that inflation is currently projected to remain too high for too long, noting that the Governing Council's decision to hike the rates is in line with its determination to ensure the timely return of inflation to the medium-term target of 2 percent, and that the elevated level of uncertainty reinforces the importance of a data-dependent approach to its policy rate decisions.

"The euro area banking sector is resilient, with strong capital and liquidity positions," the central bank underscored. "In any case, the ECB's policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed, and to preserve the smooth transmission of monetary policy."

The newest ECB staff macroeconomic projections were finalized in early March, before the recent emergence of financial market tensions, the bank noted. As such, these tensions imply additional uncertainty around the baseline assessments of inflation and growth.

Prior to these latest developments, the baseline path for headline inflation had already been revised down, owing mainly to a smaller contribution from energy prices than previously expected. The central bank's experts are now forecasting inflation averaging 5.3 percent in 2023, 2.9 percent in 2024 and 2.1 percent in 2025.  At the same time, underlying price pressures remain strong.

According to the ECB, inflation excluding energy and food continued to increase in February, and bank experts expect it to average 4.6 percent in 2023, which is higher than foreseen in December projections. It is subsequently projected to come down to 2.5 in 2024 and 2.2 in 2025, however, as upward pressures from past supply shocks and the reopening of the economy fade out and tighter monetary policy increasingly dampens demand.

The central bank's baseline projections for growth in 2023 have been revised up to an average of 1 percent as a result of both the decline in energy prices and the economy's greater resilience to the challenging international environment. ECB experts then expect growth to pick up further — to 1.6 percent in both 2024 and 2025 — underpinned by a robust labor market, improving confidence and a recovery in real incomes. At the same time, the pickup in growth in both years is weaker than had been projected in December, owing to the tightening of monetary policy.

Click here to read more about the ECB's latest monetary policy decisions.

Second rate hike in as many months

The ECB most recently raised its three key interest rates last month, with a hike of 0.5 percentage points bringing them to 3, 3.25 and 2.5 percent, respectively.

Bank of Estonia Governor Madis Müller, a member of the ECB's Governing Council, warned at the time already that it would be hiking them by another 0.5 percentage points this month as it intended to continue raising interest rates in an effort to slow inflation.


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Editor: Aili Vahtla

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