FRANKFURT, June 12 (Xinhua) -- The European Central Bank (ECB) on Thursday decided to raise interest rates by 25 basis points, the first rate hike since September 2023.
The rate hike came at a time when inflation in the euro area was picking up again and hovering well above the ECB's targeted level of 2 percent. While acknowledging that inflationary pressures warrant close monitoring, the ECB believes that a 25-bp hike will be good enough for now.
FIRST RATE CHANGE IN A YEAR
The ECB Governing Council decided to raise the three key interest rates by 25 basis points, lifting the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility to 2.25 percent, 2.4 percent and 2.65 percent, respectively.
This marked the ECB's first change in interest rates in a year, during which inflation in the euro area hovered around the 2 percent target.
It was also the ECB's first rate hike in almost three years. The central bank wrapped up an aggressive hiking cycle in September 2023, when interest rates were lifted to historical highs. The deposit facility rate stood at 4 percent.
"The war in the Middle East is generating inflation pressures," said the ECB in a press release.
ECB President Christine Lagarde disclosed that the 25-bp hike was a unanimous decision made by the Governing Council and that no other options were discussed.
RESURGENT INFLATION
Inflation in the euro area has been on the rise at a fast pace for three months, climbing to 3.2 percent in May from 3 percent in April and 2.6 percent in March.
Energy prices keep on rising sharply due to the Iran war, ticking up to 10.9 percent in May. Services inflation also inched up to 3.5 percent in May from 3 percent in April.
The resurgent inflation appears to have raised alarm at the ECB. Lena Draeger, research director of the Monetary Macroeconomics group at the Kiel Institute for the World Economy, called this development decisive, highlighting a crucial shift "away from a purely external supply shock towards broad-based price pressure."
Lagarde explained that the rate hike was driven by accelerating, broad-based inflation, an outlook that stays above the 2-percent target until late in the projection horizon, and persistent upside risks.
In its June projections made public on Thursday, the ECB revised upward its inflation projections for 2026 and 2027. Headline inflation is expected to average 3 percent in 2026, 2.3 percent in 2027 and 2 percent in 2028.
HAWKISH TURN
Lagarde has dismissed speculation that Thursday's rate hike is an "insurance rate hike", a phrase used in some media reports to indicate a pre-emptive step that can be reversed.
By resuming rate hikes ahead of its peers, the ECB has reinforced its hawkish policy stance.
The 25-bp rate hike, according to Lagarde, is a necessary step to prevent inflation from running out of control. It will be "a much more difficult situation to bring it back to the level of price stability that we have defined."
However, financial professionals warn against underestimating the growth risks. Geoff Yu, senior macro strategist at BNY, a global financial services firm under the Bank of New York Mellon Corporation, noted in a market commentary that higher rates could further dampen investment and strain an already fragile economy.
Compared with March, the ECB's June projections lowered euro area growth forecasts downward to 0.8 percent for 2026 and 1.2 percent for 2027. Nevertheless, Lagarde downplayed fears of an economic slowdown, arguing that the 25-basis-point hike leaves the central bank well-positioned to navigate war-related uncertainty.
The rate hike "is more of a symbolic move to signal the ECB's willingness and determination to avoid being too late in carrying out its policy response," Carsten Brzeski, global head of macro for ING Research, wrote in a note.
Although Lagarde stressed that the ECB is not pre-committed to any rate path, Brzeski interpreted the warnings of broadening inflation as a sign that "today's rate hike is not yet the end." ■
