Frankfurt The European Central Bank (ECB) continues to raise interest rates in the euro area. It raises the key interest rate by 0.25 percentage points to four percent. The currently even more important interest rate that banks receive for their deposits at the ECB will rise from 3.25 to 3.5 percent. The central bank announced this on Thursday afternoon.
Core inflation adjusted for energy and food prices, which are susceptible to fluctuations, was also well above this level at 5.3 percent in May. Core inflation is considered a good indicator of the medium-term price trend.
Along with the decision on interest rates, the central bank also published its forecast for inflation in the euro area. They are higher than previous expectations, especially for core inflation.
Here the ECB expects a value of 5.1 instead of 4.6 percent for this year. It is also assuming a value of 3.0 percent (previously 2.5 percent) for 2024. For 2025, they now expect 2.3 percent after 2.2 percent in March.
Their economists are also forecasting slightly higher values for overall inflation. They expect 5.4 percent this year (previously 5.3 percent), 3.0 percent in 2024 (previously 2.9 percent) and 2.2 percent in 2025 (previously 2.1 percent). In addition, the ECB is also downgrading its growth forecasts for this year and next.
Two percent target in sight
In the run-up to the Council meeting, Federal Reserve Chair Lagarde said that she had yet to see “no clear signs” that core inflation “has peaked.” At the same time, she pointed out that wage pressures are becoming an increasingly important factor in inflation. In the fourth quarter of 2022, for example, hourly labor costs rose by 5.7 percent in the euro area.
Lagarde also stressed that the ECB will raise key interest rates to a level that slows down the economy enough to bring inflation back to two percent. However, it is disputed where this point lies.
Spyros Andreopoulos, economist and ECB watcher at BNP Paribas Germany, expects further rate hikes: “Our forecast is that the ECB will raise the deposit rate to a level of 3.75 percent for the last time in July and remain there for the coming quarters . This should be necessary in order to bring inflation back to the two percent target on a sustainable basis in the foreseeable future.”
Recently there have been isolated doubts as to whether the central bank will continue to raise interest rates in July. For example, Fabio Panetta, who is a member of the ECB leadership, said in an interview with the French newspaper “Le Monde” that the central bank was not quite finished with its interest rate hikes, but that it would not go much higher. “I think now is not the time to act too quickly as we have come a long way,” he said.
Supporters of a pause argue that monetary policy works with a significant time lag. It is therefore important to wait and see the effects. On the other hand, the advocates of a tighter monetary policy point to the persistently high core inflation and the stronger rise in wages.
From 2.45 p.m. ECB President Christine Lagarde will give a press conference on the new decisions. You can follow them on our homepage in the live blog.
More to come.