European Central Bank Increases Rates by 25 bps


The European Central Bank (ECB) has increased its benchmark rate by 25 basis points following a similar move by the US Federal Reserve.

In a statement, the ECB said the inflation remains elevated, and the Governing Council concurs with its prior assessment of the medium-term outlook on inflation. At the same time, the economy remains uncertain.

The objective of the ECB aligns with the Fed’s goal of returning to a 2% rate of inflation.

Eurostat reports that the Euro area economy grew by 0.1% in the first quarter of 2023.  At the same time, the unemployment rate dropped to a new historic low of 6.5% in March.

The flash estimate for inflation was 7.0% in April, after having dropped from 8.5% in February to 6.9% in March. The energy price inflation moved from -0.9% in March to 2.5% in April. Food price inflation remains elevated at 13.6% in April, after 15.5% in March.

The Governing Council raised the three key ECB interest rates by 25 basis points, with the rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility increased to 3.75%, 4.00%, and 3.25%, respectively, with effect from 10 May 2023.

The ECB’s Asset purchase program (APP) and pandemic emergency purchase program (PEPP) continues to diminish, with the APP declining by €15 billion per month on average until the end of June 2023. The Governing Council expects to discontinue the reinvestments under the APP as of July 2023.

The PEPP will continue to reinvest principal payments from maturing securities purchased under the program until at least the end of 2024.

The Governing Council said it stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission.


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