News

European Central Bank Raises Key Interest Rate Despite Recession Fears

James L. Flint

• July 30, 2023

The European Central Bank (ECB) has raised its key interest rate by a quarter percentage point in its continuous battle against high inflation, despite concerns of a looming recession.

The rate increase marks the ninth consecutive raise by the ECB and brings the deposit rate to a 22-year high, after being below zero a year ago.

In a statement, the ECB announced that it would increase its deposit rate to 3.75% and has left room for potential further rate increases. The ECB stated, "While some measures show signs of easing, underlying inflation remains high overall." The bank's future policy decisions will focus on ensuring that interest rates maintain sufficient restrictiveness for the necessary time to reach the inflation target.

Central banks across the globe are indicating that interest rates are nearing their peak after a year of aggressive rate hikes. However, they remain cautious about declaring victory over inflation, as it has proven to be more resistant than expected in the past two years. Though inflation is decreasing in both Europe and the US, it still remains unacceptably high, particularly in Europe.

Recently, central banks in Australia, Canada, and the US paused their rate increases for a few weeks or months before resuming the hike. Last Wednesday, the Federal Reserve raised its benchmark rate to a range between 5.25% and 5.5% following a brief pause last month. Fed Chair Jerome Powell acknowledged that it was premature to determine whether this hike would conclude their series of rate increases. The Bank of England is also anticipated to increase interest rates by at least a quarter point next week from the current 5%.

During a news conference later today, ECB President Christine Lagarde is expected to keep the possibility of further rate increases open. However, Lagarde may also hint at the potential for a pause in rate increases if growth and inflation continues to ease.