The European Central Bank raises interest rates by 25 basis points at its June 2023 meeting

The European Central Bank announced Thursday that it raised its key interest rate by 25 basis points to 3.5%, diverging from the US Federal Reserve’s decision to halt its hikes on Wednesday.

The central bank has been raising interest rates since July 2022 in a bid to bring down record inflation across the region. The latest inflation reading showed prices falling faster than expected, with headline inflation coming in at 6.1% in May and core inflation – which excludes volatile items – at 5.3%. This is still well above the European Central Bank’s target of 2% headline inflation.

And while markets were widely anticipating Thursday’s decision, investors argue there is still a lot of uncertainty about what the ECB might do after the summer.

“Future Governing Council decisions will ensure that the ECB’s key interest rates will reach levels sufficiently restrictive to achieve a timely return of inflation to the medium-term target of 2% and will be held at those levels for as long as necessary,” the ECB said. in a statement.

Despite the recent slowdown in inflation, the ECB has already raised its key and core forecasts for this year and next. It now expects headline inflation of 5.4% this year, 3% in 2024 and 2.2% in 2025.

The European Central Bank has also turned more negative about growth in the years ahead, revising its growth figures to 0.9% this year and 1.5% in 2024. An estimate made three months ago put the GDP rate at 1% this year and 1.6%. %. In the year 2024.

The Euro turned bullish against the US Dollar, while European bond yields rose on the back of the announcement.

The ECB’s latest announcement followed Wednesday’s decision by the US Federal Reserve to leave interest rates unchanged. Chairman Jerome Powell said policymakers need more information to determine next steps, but the central bank expects two more quarter-point moves later in the year.

European Central Bank President Christine Lagarde is scheduled to speak at 14.45 CET.

Data released earlier this month showed that the 20-member region entered a technical recession in the first quarter of this year. GDP came in at -0.1% for the three months through March, after a contraction of 0.1% in the fourth quarter of 2022.

Poor economic performance may limit the ECB’s ability to raise interest rates to rein in inflation. However, ECB officials have previously indicated that lowering rates is more important than avoiding an economic slowdown.