ECB raises interest rates by 25 basis points to fight inflation

An exterior view of the European Central Bank headquarters in Frankfurt
An exterior view of the European Central Bank headquarters in Frankfurt Photograph: Ronald Wittek/EPA

Newsflash: The European Central Bank has voted to lift borrowing costs across the eurozone.

The ECB’s governing council has voted to raise the three key ECB interest rates by 25 basis points, or a quarter of one percent.

Announcing the move, it says:

Inflation has been coming down but is projected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner.

Eurozone inflation was recorded at 6.1% in the year to May, down from 7.0% in April, so three times higher than its target.

Today’s changes mean that the interest rate on ECB’s main refinancing operations will rise to 4%.

The marginal lending facility (used by commercial banks for short-term borrowing from the ECB) rises to 4.25%, while the deposit facility rate (paid on commercial bank deposits left at the ECB) rises to 3.5%.

Key events

Afternoon summary

Time for a recap…. here are today’s main stories.

Former Bank of England governor Mark Carney has warned that governments will be paying higher rates of interest for their debt for the foreseeable future, and that mortgage holders should adjust to this new situation.

Carney told ITV’s Robert Peston:

If you have still a few years of low interest rates on your mortgage, if you fixed just at the right time as it turned out, recognise that there will be ann adjustment over the medium term.

It’s a question of degree but the direction is very clear.

The turbulence in the mortgage market has continued, with Nationwide lifting its fixed-term mortgage rates from tomorrow….

…and average rates across the market increasing again.

In the eurozone, the European Central Bank has lifted its key interest rates by a quarter of one percent.

The ECB warned that inflation is projected to remain too high for too long, as it lifted its forecasts for price rises over the next few years.

ECB president Christine Lagarde indicated that eurozone interest rates will be lifted in July too, saying:

“Are we done? Have we finished the journey? No. We’re not at our destination.

Do we still have ground to cover? Yes, we still have ground to cover.

And in other news:

Pound at one-year high against US dollar

Sterling has hit a 14-month high against the US dollar for the second day in a row.

The pound has gained 0.8 of a cent to $1.2745, the highest since April 2022.

The dollar has been pushed down by new economic data showing US industrial output fell by 0.2% in May, while new jobless claims were higher than expected last week.

US jobless claims steady last week after recent runup. Although new filings for unemployment benefits have jumped lately the numbers remain low and so it’s still debatable if this is a sign of deteriorating labor market conditions:

— James Picerno (@jpicerno) June 15, 2023

The euro has hit a 15-year peak against the yen and a fresh four-week high against the dollar, after the European Central Bank raised interest rates and signalled that a July hike is on the cards too.

As flagged earlier, here are the ECB’s new forecasts for inflation (slightly higher than the old projections)….

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….and growth (down a bit this year, and next)

Analysts: A hawkish ECB….

Mohit Kumar, chief European economist at Jefferies’, says the European Central Bank’s decision – and press conference – were a little hawkish.

Kumar says:

“A touch on the hawkish side, with core inflation projections revised meaningfully higher (5.1% vs 4.6% for 2023, 3% vs 2.5% for 2024).

“However, Lagarde let pass a number of opportunities to sound more hawkish. She indicated that they will hike more, but only mentioned July rather than multiple hikes. The market is already pricing in a July hike and 60% chance of a September hike. The ECB does not see wage price spiraling. She also attributed to past hikes making their way forcefully into the economy, in a nod to lags of monetary policy transmission.

“Overall, the press conference does not change our view of the ECB or Bunds. We still believe that ECB terminal rate would be 3.75%, though of course it would be data dependent, particularly on inflation.

Roman Ziruk, Senior Market Analyst at global financial services firm Ebury, agrees, calling today’s ECB decision as a ‘hawkish hike’.

Ziruk explains:

The Governing Council reiterated that inflation is expected to remain ‘too high for too long’ and the core inflation forecasts were revised up rather substantially.”

“Additionally, President Lagarde didn’t shy away from striking a hawkish tone during the press conference, repeating that the bank has ‘more ground to cover’ and making it clear that we should expect another rate hike in July.”

“The ECB communication suggests that the bank is concerned about the effects of a strong labour market on inflation. The ECB is clearly not convinced that price pressures will be able to come down to an acceptable level on their own.

Felix Feather, European economic analyst at Abrdn, believes the next rate rise – inked in for July – could be the last…

“The ECB isn’t missing a beat in its rate hiking cycle – tightening another 0.25% to bring the deposit rate to 3.5%. While the ECB continues to stress data dependence, President Lagarde suggested a July hike is very likely as well.

We think that hike will be the last of the cycle, given the turn lower in inflation. But wage growth is still very strong, so there’s a decent chance that they end up hiking in September as well.

With policy already in restrictive territory, and the lagged effects of previous hikes still passing through to the real economy, investors must contend with both higher rates, still high inflation, and the possibility of a policy-driven recession later in the year.”

This is the key message from the ECB’s president today:

Back in Frankfurt, ECB president Christine Lagarde says the eurozone is not experiencing a wage-price spiral.

Lagarde says:

“We are not seeing a second-round effect. We are not seeing a wage-price spiral…

The sooner the better in terms of when do we bring inflation back to 2%, but we have also to be realistic and measured in the response that we give.”

She then explains that rising unit labour costs did contribute to the upward revision to eurozone core inflation forecasts.

Nationwide lifts fixed-term mortgage rates from Friday

Back in the UK, Nationwide Building Society is to raise its fixed rates on mortgages offered via brokers by up to 0.7 percentage points tomorrow.

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Nationwide says:

“This includes rates across our New Business, Switcher, Additional Borrowing and Existing Customer Moving Home ranges.”

This follows the increase on wholesale borrowing costs in the last few weeks, which are expected to drive UK interest rates higher and keep them high (as Mark Carney warned last night).

The quoted rate offered by Nationwide on a 2-year fix for new borrowers, available for a £999 fee, will rise on Friday to 5.69% across most loan-to-value ratios, from 5.24% currently.

Today we took these monetary policy decisions:

🔵 We raised interest rates by 0.25 percentage points

🔵 Our future decisions will depend on how we see inflation developing and how well our past rate hikes tame inflation

— European Central Bank (@ecb) June 15, 2023

Lagarde: Not begun thinking about skipping rate increases

Q: Could the ECB consider skipping rate rises at certain meetings, and only make changes when you also release new forecasts (which would be every other meeting)?

Lagarde reiterates that the ECB still has ground to cover to reach its inflation target.

The governing council have not discussed a skip, and not begun thinking about it either, “because we have work to do”.

Q: Your new forecasts show you don’t expect to reach your 2% inflation target in the next three years – so is 3% the new 2%?

Lagarde says the ECB is in the middle of its fight against inflation, and insists it will get inflation down to the 2% target, (rather than shuffling the target up to make it more achievable).

Q: Were today’s decisions unanimous?

Christine Lagarde says there was “quite a harmonious discussion” at this month’s meeting, with some deep analysis of the eurozone labour market and the factors driving inflation.

“It was a very, very broad consensus,” she insists, to raise interest rates and to confirm that the ECB would stop reinvesting cash from maturing bonds bought through its asset purchase programme.

That’s not exactly confirmation that the decisions were unanimous, though….

Lagarde says GC meeting was harmonious and points to broad consensus, but doesn’t mention word unanimity in twofold decision

— Maria Tadeo (@mariatad) June 15, 2023

Christine Lagarde explains that the ECB wants to get inflation down to its 2% target, and feel confident that it will stay there.

The ECB chief explains that the governing council need to be confident that core inflation is heading downwards

Q: How alarmed are you by the upward revisions to eurozone inflation in 2025 – will that mean that prevous expectations that terminal rate of interest (peak rates) of 3.75% will not be enough?

Lagarde says the ECB isn’t satisfied by the inflation outlook.

Lagarde isn’t tempted into commenting on the terminal rate.

It is something we will know when we get there, she says.

Lagarde: July rate rise is very likely; we’re not done yet

The ECB are now taking questions…

Q: Is the ECB close to pausing its monetary policy tightening, and what is your take on the US Federal Reserve holding interest rates last night?

Christine Lagarde says today’s decision, to raise interest rates, followed analysis of the latest economic data and new staff forecasts.

Lagarde says the ECB’s decisions are ‘data-dependent’, and insists that further increases in borrowing costs will be needed.

She says:

Are we done? Have we finished the journey? No, we’re not at the destination.

Do we still have ground to cover? Yes.

Unless there is a material change to the ECB’s forecasts, Lagarde adds, the central bank is very likely to raise interest rates again in July.

And on the Fed, Lagarde says she doesn’t know the difference between a ‘pause’ and a ‘skip’ (two terms banded around to describe last night’s no-change). But the ECB is not thinking about pausing.

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