The council, which decides on monetary policy, also hints that it will continue raising interest rates. In less than a year, the European Central Bank has tightened monetary policy eight times.
European the central bank decided to tighten monetary policy again on Thursday. The key interest rates will be increased by 0.25 percentage points in order to curb the increase in consumer prices, i.e. inflation.
The council, which decides on monetary policy, hints in its decision that interest rate hikes must continue.
“With its interest rate decisions, the Council ensures that the policy interest rates are able to curb demand sufficiently, and that the return of the inflation rate to the two percent target is not too far into the future. It depends on the development of the situation, how much and for how long interest rates will be raised.”
As a result of the decision, the interest rate for basic financing operations will be increased to 4.00 percent and the deposit rate for commercial banks to 3.50 percent. The decision meets the expectations of the financial market.
Director general Christine Lagarde explains the decision in more detail at a press conference starting at 3:45 p.m., which Helsingin Sanomat will broadcast live.
In less than a year, the European Central Bank has tightened monetary policy eight times. In the fall, it twice resorted to exceptionally large rate hikes of 0.75 percentage points for the first time in its history.
The beginning of the year inflation in the euro area has slowed considerably during the period, but still not close enough to the central bank’s target.
In May, the inflation rate was 6.1 percent, while it was still 10.6 percent in October. According to the central bank’s price stability objective, inflation should be two percent in the medium term.
Based on the new economic forecast published on Wednesday, euro area inflation will slow to 5.4% this year, 3.0% next year and 2.2% in 2025.
“The effect of previous interest rate increases is already clearly visible in the development of financial conditions and gradually in the wider economy as well. Borrowing costs have risen significantly, and the development of the loan portfolio is slowing down. As financial conditions tighten, demand is expected to decrease, and so the rate of inflation will return closer to the medium-term goal in expert estimates,” the council that decides on monetary policy estimates.
In addition to inflation, the central bank has to weigh the impact of interest rate hikes on economic growth, as the risk of recession is still overshadowing the euro area. At the beginning of the year, the economy shrank by 0.1 percent from the previous quarter.
Tightening monetary policy slows down economic growth and, as a result, also inflation. Due to the sharp increase in prices, the real income of households shrinks and the costs of companies increase, as a result of which consumption and production decrease.
Based on the forecast, the euro area economy will grow by 0.9 percent this year, 1.5 percent next year and 1.6 percent in 2025.
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