ECB raises key rate to all-time high, despite deteriorating economic outlook

The European Central Bank raised its key rate to an all-time high of 4% to anchor inflation in the euro zone, despite pressure to take a break to give the economy a breather given worsening forecasts.

This is the tenth consecutive rise since the European issuer (ECB) adopted in July 2022 the most restrictive monetary policy in its history due to an escalation in prices due to the effects of the Russian invasion against Ukraine and its impact on the cost of energy.

“Inflation continues to slow, but is expected to remain too high for too long”, the issuer of the 20 countries that use the euro reported in a statement.

The governors of ECB They decided to raise rates again, with an increase of 0.25 points in the deposit rate, set at 4%.

This index is key to banking operations in the euro zone and is now at its highest level since the introduction of this currency in 1999.

The main scale refinancing rate was left at 4.50% and the marginal credit facility rate at 4.75%.

This increase in the guideline rate occurs in a context of signs that there is a deterioration in activity in the euro countries.

He ECB cut its forecasts for the growth of the economies of the euro countries, with an expansion of the GDP forecast of 0.7% in 2023, 1% in 2024 and 1.5% in 2025.

In its analysis made in June, the entity forecast economic growth of 0.9% this year, 1.5% in 2024 and 1.6% in 2025.

But the decision on Thursday weighed more heavily with an upward adjustment in the forecasts of the ECB on prices for 2023 and 2024, with a rise of 5.6% this year and 3.2% the next.

In 2025, the issuer projects an inflation level of 2.1%, which is close to the entity’s medium-term objectives, set at around 2%.

He ECB predicted in June that the eurozone would register inflation of 5.4% this year and 3% in 2024, with prices rising 2.2% in 2025.

Division among governors

Following the announcement of the decision, the president of the ECBFrenchwoman Christine Lagarde stated that rates reached a level that will contribute significantly to anchoring prices.

Lagarde admitted that the decision to raise rates had a “solid majority”, but it was not unanimous.

“Obviously, some members did not reach the same conclusion, and some governors would have preferred a pause (…) but I can tell you that a solid majority agreed with this decision.”Lagarde declared.

The head of the issuer refrained from insinuating whether the increases reached a ceiling and affirmed that the next decisions will depend on the indicators.

“We cannot say that we have reached a peak”Lagarde stated.

Before the meeting, there was no consensus among experts on whether the ECB would launch a new rate hike or take a breather due to growing signs of tensions in the euro zone.

Lagarde He acknowledged that the situation is getting worse. “The economy is likely to remain weak in the coming months“, he claimed.

Source: AFP