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15 July 2024


Business Insider Bangladesh

European Central Bank raises interest rates by 0.25%

BI Report || BusinessInsider

Published: 11:27, 15 September 2023   Update: 12:36, 15 September 2023
European Central Bank raises interest rates by 0.25%

Photo: Collected

The European Central Bank hiked a key interest rate to a record high on Thursday as it battles stubbornly high inflation but indicated that its historic hiking cycle may be at an end.

The inflation continues to decline but is still expected to remain too high for too long.

The Governing Council is determined to ensure that inflation returns to its 2 percent medium-term target in a timely manner.

In order to reinforce progress towards its target, the Governing Council on Thursday decided to raise the three key ECB interest rates by 25 basis points.

The rate increase today reflects the Governing Council’s 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 September ECB staff macroeconomic projections for the euro area see average inflation at 5.6 percent in 2023, 3.2 percent in 2024 and 2.1 percent in 2025.

This is an upward revision for 2023 and 2024 and a downward revision for 2025. The upward revision for 2023 and 2024 mainly reflects a higher path for energy prices.

Underlying price pressures remain high, even though most indicators have started to ease.

The ECB staffers have slightly revised down the projected path for inflation excluding energy and food, to an average of 5.1 percent in 2023, 2.9 percent in 2024 and 2.2 percent in 2025.

The Governing Council’s past interest rate increases continue to be transmitted forcefully. Financing conditions have tightened further and are increasingly dampening demand, which is an important factor in bringing inflation back to target.

With the increasing impact of this tightening on domestic demand and the weakening international trade environment, ECB staffers have lowered their economic growth projections significantly.

They now expect the euro area economy to expand by 0.7 percent in 2023, 1.0 percent in 2024 and 1.5 percent in 2025.

Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.

The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.

The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.

In particular, the Governing Council’s interest rate decisions will 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.

Key ECB interest rates

The Governing Council decided to raise the three key ECB interest rates by 25 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 4.50 percent 4.75 percent and 4.00 percent respectively, with effect from 20 September 2023.