ECB Hikes 0.25%, Pushing Rates To 22-Year Highs: Lagarde Says 'We Have More Ground To Cover'

Zinger Key Points
  • The ECB hiked its interest rates by 0.25%, pushing the cost of money to the highest since July 2001.
  • ECB Governor Lagarde intimated that more rate hikes are on the way, possibly as early as July.

In an effort to combat elevated inflationary pressures, the European Central Bank (ECB) announced a 0.25% increase in its key interest rates, bringing the cost of borrowing to the highest levels in over two decades. ECB Governor Christine Lagarde said that inflation is projected to remain too high for too long.

“We are not at the destination, we have ground to cover,” the Lagarde said, adding that an additional interest rate hike will occur in July.

In the statement, the ECB highlighted that remains committed to bring interest rates to a sufficiently restrictive level to achieve a return to the 2% inflation target and keep them at that level for as long as necessary. The ECB has also confirmed that it will cease reinvestments under the asset purchase program as of July 2023.

The euro strengthened 0.5% against the dollar, with the Invesco CurrecyShares Euro Currency Trust FXE, up 0.5% to the 100.50 level. European equities, as tracked by the SPDR DJ Euro STOXX 50 Etf  FEZ, slightly weakened.

Chart: ECB Deposit Rates Jump to July 2001 Levels

Also Read: Mark Cuban Suggests A ‘Netflix Model’ To Change The US Healthcare And Pharmaceutical Industry

Stagflation Kicks In: ECB Now Sees Weaker Growth And Higher Core Inflation

According to the June macroeconomic projections, the ECB has slightly lowered its economic growth projections for the coming years, now expecting a 0.9% rise in 2023, 1.5% in 2024, and 1.6% in 2025.

Underlying or core inflation, which excludes energy and food, was revised higher to 5.1% in 2023, before it declines to 3.0% in 2024 and 2.3% in 2025. 

The ECB will base its interest rate decisions on data and a thorough assessment of various factors, including inflation projections, economic and financial indicators, underlying inflation trends, and the efficacy of monetary policy implementation.

Lagarde’s Press Conference: Hawkish

  • “We are not thinking about pausing our rate hikes,” Lagarde said, responding to a question on how far the ECB is from duplicating the Fed’s decision of pausing the rate tightening.
  • The Governor admitted that the ECB hasn’t yet reached the final point in the hiking cycle, stating that “it’s the 2% inflation that we want”.
  • “We have not begun thinking about skipping or pausing a meeting,” Lagarde said.
  • Looking at the drivers of inflation, the labor market was considered one of the major factors, as wage growth rose 5.2% in the first quarter. Lagarde highlighted that there is an issue of unit labor costs, as growth was stagnant last quarter.

Read also: Unemployment Claims Exceed Expectations, Yet Robust Retail Sales Indicate Resilient Consumer Demand

Photo: Shutterstock

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Posted In: Macro Economic EventsEurozoneEconomicsFederal ReserveChristine Lagardeecbeuroeuro areaEuropean Central BankInterest RatesLagarde
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