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ECB Announces 25 Basis Point Interest Rate Hike

The European Central Bank (ECB) opted for a 25 basis point interest rate increase on Thursday, diverging from its recent trend of more aggressive 50-point hikes. This decision was in line with expectations.

European Central Bank
European Central Bank

The Inflation Outlook Remains Uncertain

In its statement, the ECB's Governing Council expressed concerns over inflation staying "too high for too long" while underlying price pressures remain uncertain.

Future Rate Movements and Data-Dependent Approach

The ECB did not commit to a specific increase at their next meeting in June, stating that economic and financial expectations for inflation will determine future rate movements. The Governing Council will maintain a data-dependent approach for determining the appropriate level and duration of restriction.

New Interest Rates and Balance Sheet Reduction

The ECB's main refinancing operations rate will now be 3.75%, the deposit facility rate at 3.25%, and the marginal lending facility rate at 4.00%. The central bank will also continue reducing its balance sheet at the current rate of €15 billion per month until the end of June.

Lagarde's Stance on Interest Rate Increase

ECB president Christine Lagarde stated that there was near-unanimous support for the smaller interest rate increase and hinted that this might not be the last hike in the current tightening cycle.

Eurozone Inflation Data and ECB's Priorities

Recent eurozone inflation data supported a more dovish approach from the ECB, which prioritizes curbing price growth. Core prices inched lower in April to 5.6%, still above the central bank's 2% medium-term target, while headline inflation rose to 7%.

Bank Lending Survey Results and Economic Impact

The ECB's quarterly Bank Lending Survey revealed that banks are making it more difficult for borrowers to obtain credit as loan demand weakens. Analysts at ING suggest the ECB has entered the final stage of its rate hike cycle, with weak credit growth and the latest survey results showing the economic impact of rate hikes.