The European Central Bank (ECB) once again raised its interest rates, by 0.25 percentage point, on Thursday May 4, taking into account both the timid decline in inflation, excluding energy prices , and weak economic growth in the euro zone.
Continuing a series of six rate hikes since July 2022, the ECB believes that it still has a long way to go before ending its monetary tightening cycle. “Now is not the time” to stop raising rates, its chief economist Philip Lane warned in late April. On Thursday, the 26 members of the ECB’s governing council had a wealth of fresh data to decide on the scale of a new hike. A majority of economists were counting, before the announcement, on an increase of 0.25 percentage point, after 0.5 point in March.
The reference rate, by remunerating excess bank deposits dormant at the ECB counter, is therefore increased from 3.0% to 3.25%. By making credit more expensive, the ECB wants to curb demand for mortgage loans, for consumption or for business investments and thus slow down the rise in prices.
A sharp rise in rates could create new tensions
Inflation in April still sailed well above the 2% target, regaining 0.1 percentage point, to 7%, after months of slowdown. But excluding energy, food, tobacco and alcohol prices, “core” inflation fell for the first time in a year, to 5.6% from 5.7% in March, according to Eurostat.
A significant slowdown in inflation is not expected in the short term, given the wage increases granted in several sectors, such as in Germany for public service employees. In the banking sector, lending conditions are getting tougher than ever since the 2011 sovereign debt crisis and demand for credit is feeling the pinch, according to the latest ECB data. Monetary tightening is thus gradually taking effect: “All these impacts will continue to spread through the economy gradually, it’s not over,” predicted Mr. Lane.
If the danger of a banking crisis present in March has receded, a sharp rise in rates could create new tensions. Finally, the weak growth of the Gross Domestic Product in the euro zone, of 0.1% in the first quarter, attests to the slowdown desired by the ECB, but also to the vulnerability of the euro zone economy.
On Wednesday, the US Federal Reserve (Fed) had raised its key rate by a quarter of a point, as expected, which initially delighted the market. But investors didn’t like statements from Fed Chairman Jerome Powell, who said “no decision on a pause was made today” and dismissed the idea of a price cut. rate this year. On the bond market, interest rates on the debts of the United States and European states remained stable on Thursday.
