Eurozone: ECB raises rates by 0.25 points

The European Central Bank (ECB) announced Thursday a new increase in its interest rates, the eighth in less than a year, in its fight against inflation which should remain too high for many months yet. As expected, the guardians of the euro agreed on a rise of 0.25 percentage points, as in May.

On the other hand, they did not reveal their game on the rest of the trajectory, while many observers are counting on a new increase of a quarter of a point at the July meeting. In their statement, they simply observe that their future decisions “will ensure that the key ECB interest rates are reduced to levels sufficiently restrictive to allow a rapid return of inflation to the medium-term objective of 2”% .

“They will be maintained at these levels for as long as necessary” and the institution will decide based on current data and forecasts. To try to find out more, the statements of the President of the ECB, Christine Lagarde will be listened to with the greatest attention during the press conference scheduled from 12:45 GMT, at the headquarters of the institution in Frankfurt.

After a decade of cheap money, the ECB embarked on an unprecedented round of monetary tightening to counter soaring consumer prices in the wake of Russia's offensive in Ukraine. By raising rates, central bankers reduce demand for credit and therefore investment and consumption by households and businesses alike, with the consequences of a slowdown in demand and therefore pressure on prices. The ECB has raised rates by 4 percentage points since July 2022.

Inflation remains high and continues to worry politicians faced with protests from public opinion whose purchasing power is reduced month after month. “Inflation is slowing down, but should remain too high for too long a period,” observes the ECB in its press release.

The rise in prices in the euro zone fell back to 6.1% over one year in May, far from the record of 10.6% reached in October, but also far from the 2% target pursued by the ECB. The institution even slightly raised, in its updated forecasts on Thursday, the level of price increases expected until 2025: inflation should reach 5.4% in 2023, against 5.3% forecast in March, then 3, 0% in 2024 and 2.2% in 2025, not far from the 2% objective targeted in the long term.

The entry into recession in the euro zone has not affected the firmness of the institution: the GDP (Gross Domestic Product) of the 20 countries sharing the single currency fell by 0.1% between January and March, after a drop of the same magnitude in the previous quarter. Taking note of this slowdown, the ECB has revised its growth forecasts downwards: GDP growth is expected at 0.9% this year, against 1.0% previously forecast, then 1.5% in 2024 and 1, 6% in 2025, according to new data released Thursday.

“The European Central Bank continues its upward cycle and announces no sign of a break soon,” comments Carsten Brzeski, of ING bank. Especially since the effects of the monetary tightening are not immediate: they should be at their maximum level in 2024, explained Isabel Schnabel, member of the Executive Board of the ECB, while acknowledging "that great uncertainty reigns over the vigor and rapidity of this process".

But she had felt that it was better to risk doing too much than not enough, "the cost of too weak an action being greater than that of too forceful an action". The American central bank (Fed) decided on Wednesday to leave its rates unchanged after ten increases in a row to give itself time to assess the situation. But Fed officials mostly plan to raise rates further by the end of 2023.