Euro Area: ECB sticks to the script and hikes rates by another 25 basis points in June

Euro Area Monetary Policy June 2023

Euro Area: ECB sticks to the script and hikes rates by another 25 basis points in June

At its 15 June meeting, the European Central Bank (ECB) hiked the main refinancing operations rate, the marginal lending facility and the deposit facility rates by 25 basis points to 4.00%, 4.25% and 3.50%, respectively. The decision, which was widely expected by markets, delivered the eighth consecutive hike and brought the cumulative increase since July 2022 to 400 basis points. Moreover, the Bank reiterated that it will stop reinvestments under its Asset Purchase Programme (APP) in July, equivalent to reducing its asset portfolio by EUR 15 billion by the end of June.

The decision to continue hiking was due to stickier-than-expected headline and core inflation and upwardly revised inflation projections. May saw headline inflation fall to 6.1% from April’s 7.0%, while in the same month, inflation excluding energy and food declined for the second consecutive month to 5.3% from 5.6%. That said, the ECB stated that inflation “is projected to remain too high for too long”. The Bank released new inflation and growth forecasts: These predict inflation of 5.4% this year, 3.0% in 2024 and 2.2% in 2025 (previous forecasts: 5.3%, 2.9% and 2.1%, respectively), while GDP is expected to grow 0.9% this year, 1.5% in 2024 and 1.6% in 2025 (previous forecasts: +1.0%, +1.6% and +1.6%, respectively).

The Bank again kept the door open to further hikes, stating that “interest rates will be brought to levels sufficiently restrictive” to hit the 2.0% target in the medium term. To this end, it said it was “ready to adjust all of its instruments within its mandate”. That said, it added that “past rate increases are being transmitted forcefully to financing conditions and are gradually having an impact across the economy”. Future monetary policy decisions will thus be based on a meeting-by-meeting and data-dependent approach.

The next meeting is scheduled for 27 July.

Commenting on the ECB’s decision, Carsten Brzeski, global head of macro at ING, noted:

“The ECB simply cannot afford to be wrong on inflation. The Bank wants and has to be sure that it has slayed the inflation dragon before considering a policy change. This is why they are putting more than usual emphasis on actual inflation developments. Even if this completely contradicts forward-looking monetary policy, the ECB is in no position to take a chance.”

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