In light of the ongoing high inflation pressures, the Governing Council of the European Central Bank (ECB) decided to raise the key interest rates by 25 basis points (100 basis points makes 1 percentage points).
Raising interest rates typically help in cooling demand in the economy and thus helps in managing inflation.
Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.75%, 4.00% and 3.25% respectively, with effect from 10 May 2023.
The ECB has hiked rates repeatedly since July last year to rein in high inflation. Prior to the latest hike, the extent of the hike was 50 basis points. In its monetary policy statement, the ECB said the inflation outlook continues to be "too high for too long".
Drop in energy prices
Energy prices have dropped sharply in recent months but prices for food and services are still rising strongly.
"Headline inflation has declined over recent months, but underlying price pressures remain strong. At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain," the statement added.
It believes the ongoing monetary policy actions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2 per cent medium-term target and will be kept at those levels for as long as necessary.
Inflation
According to Eurostat's estimate, inflation was 7.0 per cent in April, after having dropped from 8.5 per cent in February to 6.9 per cent in March. April's was reportedly the first increase after five consecutive monthly declines.
"Our future interest rate moves will depend on how we see the economy and inflation developing and how well our rate hikes are taming inflation," ECB said.
Further, on business activity status, Christine Lagarde, President of the ECB, Luis de Guindos, Vice-President of the ECB said the business and consumer confidence have recovered steadily in recent months but remain weaker than before the war in Ukraine.
"We see a divergence across sectors of the economy. The manufacturing sector is working through a backlog of orders, but its prospects are worsening. The services sector is growing more strongly, especially owing to the reopening of the economy," they told reporters.
