ECB raises key interest rates by 25 bps amid persistent high inflation

27 Jul '23

2 min read

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To combat high inflation, the ECB Governing Council is increasing 3 key interest rates by 25 bps. Despite a downward trend, inflation will remain above target for a while, ECB said. The Council will maintain these restrictive rates to meet the inflation target. It also set the remuneration of minimum reserves at 0 per cent for monetary policy efficiency.

In a move aimed at curbing high inflation, the Governing Council of the European Central Bank (ECB) has decided to raise the 3 key interest rates by 25 basis points. The rate on the main refinancing operations, the marginal lending facility, and the deposit facility, will be increased to 4.25 per cent, 4.50 per cent, and 3.75 per cent, respectively. These changes will take effect from 2 August 2023.

Despite a declining trend, inflation is still expected to stay above the target for an extended period, the ECB said in a press release.

The decision to raise rates reflects the Governing Council’s assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. Financing conditions have tightened due to previous rate increases, thereby dampening demand, an essential factor in driving inflation back to target.

The ECB has stated that it will ensure that these key interest rates are set at adequately restrictive levels as long as necessary to meet the inflation target. Future decisions will continue to be data-dependent, basing interest rate changes on assessments of the inflation outlook, incoming economic and financial data, and the robustness of monetary policy transmission.

In another decision to preserve the effectiveness of monetary policy, the Governing Council set the remuneration of minimum reserves at 0 per cent. This measure is expected to maintain control over the monetary policy stance and ensure the full pass-through of interest rate decisions to money markets. It will also enhance the efficiency of monetary policy by reducing the total amount of interest required to be paid on reserves.

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