ECB Raises Benchmark 50 Basis Points; Expects to Keep Hikes Going to Tackle Inflation

The European Central Bank (ECB) raised its benchmark interest rate by 0.5%, adding that it sees further increases. It also raised its inflation forecasts. It now sees 8.4% inflation in 2022, 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025.

Interest rates “will still have to rise significantly at a steady pace”, officials said.

The EUR/USD edged lower after the news.

Pre-Report Forecast

Ahead of its interest rate decision, traders were looking for the European Central Bank to raise interest rates for the fourth time in a row, although by less than at its last two meetings, and lay out plans to drain cash from the financial system as it fights runaway inflation.

The ECB has been raising rates at an unprecedented pace to rein in prices that have soared since economies reopened after the COVID-19 pandemic, driven by supply bottlenecks and then surging energy costs following Russia’s invasion of Ukraine, Reuters wrote.

The central bank for the 19-country Euro Zone raised interest it pays on bank deposits from -0.5% to 1.5% in just three months, reversing a decade of ultra-easy policy after being wrong-footed by the sudden rise in prices.

But today’s policy meeting is likely to see this brisk pace of tightening slow as inflation shows signs of peaking and a recession looms.

A Reuters poll of economists expected the ECB to raise interest rates by half a percentage point after 75-basis-point hikes at each of its two previous meetings, mirroring the U.S. Federal Reserve’s change of pace on Wednesday.

But like the Fed, the ECB was expected to flag even higher borrowing costs ahead to persuade investors it is still serious about fighting inflation, which could stay above the ECB’s 2% target through 2025, according to Reuters.

Immediate Reaction

The 50 basis point rate hike was expected, but the ECB did give “very” hawkish guidance based on the “substantial upward revision” to inflation, noting that interest rates will still have to rise “significantly at a steady pace” to reach levels that are sufficiently restrictive.