The ECB has just increased its key policy rates by 25 basis points. The deposit rate is now 3.75%. Even more interestingly, the accompanying statement left the door wide open for further rate hikes and did not strike a more cautious tone. It remains to be seen whether this stance will be confirmed at the press conference.
After the pre-announcement in June, it was difficult not to raise interest rates today. On ECB it was pointed out too clearly that the risk of stopping the rate hikes prematurely is much higher than going too far.
However, the recent negative data from the Eurozone, i.e. weak purchasing managers’ indices and a weak Ifo index, a further decline in demand for new bank loans, tighter lending standards and weak credit growth, must have had a chilling effect on the mood at EuroTower, even if this was not reflected in the policy statement.
Indeed, the ECB website is once again in danger of lagging behind developments. This time not because it has understated inflation, but because it has been too optimistic and understated the economic impact of its own policies.
Looking ahead, today’s initial announcement keeps the door wide open for more rate hikes. The mention that inflation is falling but will remain above target “for an extended period” does not sound like the ECB is ready to stop raising rates.
In fact, the ECB will have to revise its own growth and inflation forecast for September significantly downward to keep the central bank from raising rates at least again after today, and that also depends somewhat on what ECB President Christine Lagarde says at the press conference.
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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 4.25%, 4.50% and 3.75% respectively, with effect from 2 August 2023.
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 to achieve a timely return of inflation to the 2% medium-term target.
The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will continue to 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.
The Governing Council also decided to set the remuneration of minimum reserves at 0%. This decision will preserve the effectiveness of monetary policy by maintaining the current degree of control over the monetary policy stance and ensuring the full pass-through of the interest rate decisions to money markets.
At the same time, it will improve the efficiency of monetary policy by reducing the overall amount of interest that needs to be paid on reserves in order to implement the appropriate stance.
