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ECB raises key interest rate as Fed hits pause

June 15, 2023

The European Central Bank announced a quarter-point interest rate hike as inflation remains too high. The move comes after the US Fed left rates unchanged.

The headquarters of the European Central Bank (ECB) in Frankfurt, Germany
The ECB has suggested it will continue to raise rates in a bid to tackle inflationImage: Ralph Orlowski/Getty Images

The European Central Bank announced a 0.25% raise on Thursday, bringing the eurozone's key interest rate to 4%. 

"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 4.00%, 4.25% and 3.50% respectively," the ECB said in a statement.

Inflation remains persistent, with ECB chief suggesting further hikes

While the eurozone fell into recession, the eighth consecutive interest rate hike was aimed at persistent inflation.

"The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner," the bank said. 

Year-on-year inflation in the bloc decelerated to 6.1% in May, but it remained more than three times the bank's 2% target.

ECB President Christine Lagarde suggested that more rate hites, including at the bank's next meeting on July 27, could be on the horizon.

"Are we done? Have we finished the journey? No, we're not at destination. Do we still have ground to cover? Yes, we have ground to cover," Lagarde told reporters.

The ECB head said the monetary institution "will continue to hike at our next meeting. So we are not thinking about pausing, as you can tell."

Lagarde pointed to factors such as wage increases and firms forcing up prices to increase their profits as key drivers of inflation.

Raising interest rates could bring down prices, but it could also provoke an economic downturn by bringing down demand. The ECB has said it will "follow a data-dependent approach" when it comes to rates and the economy. 

Inflation: A global threat

US Fed freezes rates

On Wednesday, the US Federal Reserve paused its recent series of interest rate increases but warned that inflation remained "elevated" and implied that rates might rise again this year.

The Fed's benchmark lending rates will therefore remain between 5.0% and 5.25%, following 10 consecutive increases, in a bid to bring inflation accelerated by Russia's invasion of Ukraine under control.

lo,wd/fb (AFP, Reuters)