In order to contain the soaring consumer price inheritance, the European Central Bank raised the interest rates of the three major sticking points by 25 basis points on Thursday, to the highest level since October 2008, and at the same time pointed out that “the inflation prospect is still the pillar at too high a level for too long”, indicating that it will continue to raise interest rates in the future.
After this interest rate increase, the convenient deposit rate of the European Central Bank is 3.25%, the corner deposit rate is 4.00%, and the main refinancing rate is 3.75%. This is also the seventh consecutive interest rate increase by the central bank since July 2022. The previous three gatherings all raised interest rates by 50 basis points.
“Overall inflation has declined in recent months, but the potential price pressure remains strong,” the European Central Bank said on Thursday. The inflation data released earlier this week showed that the harmonized consumer price index (CPI) in the euro zone increased by 7% year-on-year in April, which was the same as expected. Excluding food and power prices, the focus CPI increased by 5.6% year-on-year, which was unexpectedly lower than expected.
Last week, the domestic money fund structure (IMF) said that it is estimated that inflation in the euro zone will not fall back to the European Central Bank’s target of 2% until 2025.
Recent data also show that in the first quarter, the euro zone economy increased as expected, and the seasonally adjusted gross domestic product (GDP) only increased by 0.1%. However, the unemployment rate in March improved slightly from last month to 6.5%.
In addition, the European Central Bank issued a quarterly inspection report on banks on Tuesday, saying that banks in the euro zone have tightened their credit standards to the highest extent since the debt crisis in 2011, which can mean that interest rate hikes have begun to take effect on the real economy.
In the strategy statement issued after the meeting, the European Central Bank showed that the past interest rate increase is being strongly transmitted to the financing and coin system of the euro zone, but it also pointed out that “the lag and intensity of transmission to the real economy are still uncertain.”
It is stated that it will not give more forward-looking instructions on future interest rate choices, but only show that future choices will be based on new economic data, so that inflation can return to 2% in time.
The European Central Bank also showed that it can reinvest under the “Property Purchase Plan” (APP) in July, and increase the scale reduction from the current 15 billion euros to 25 billion euros to increase the cost of fake loans. This bond purchase plan was driven in mid-2014 to cope with the continuous low inflation.
Analysts believe that the reason why the European Central Bank chose to reduce its property debt table at a faster rate is to make hawks in the governance Committee refuse to raise interest rates at a smaller rate. On Thursday, President of the European Central Bank (ECB) Latinde said that a 25-basis-point interest rate increase was unanimously approved by the Committee.
Latinder’s performance: “It is fair and true that everyone is willing to raise interest rates, and it is necessary, and we will not stop. This is very clear … we have more rest to do.”
Since last year, European and American central banks have substantially raised interest rates to cope with soaring inflation. However, with the price pressure falling from the peak and the imminent credit compression, many economists thought that the interest rate compression cycle was coming to an end.
The day before, the Federal Reserve announced that it would raise the federal funds rate by 25 basis points to the range of 5%-5.25%, the highest level since August 2007. The central bank also showed that it could be close to stopping interest rates and raising interest rates.
Investors estimate that the European Central Bank will continue to raise interest rates in the coming months, while the Federal Reserve will cut interest rates. This difference has pushed up the price of the euro against the dollar.
At the news conference, Latinde showed that the central bank did not stop raising interest rates, and the choice to speed up the pace of interest rate increase was “based on more places to be uncovered, and we will not stop”.
Analysts pointed out that the European Central Bank can need to see more confirmation of the slowdown of price pressure before it runs to raise interest rates, even though some important purposes are growing in the right direction.
According to Refinitiv’s data, investors estimate that the European Central Bank will raise its key interest rate to slightly above 3.5% before the end of the year, while the Federal Reserve will cut its key interest rate by 75 basis points to around 4.3%.