ECB hikes quarter percentage points, warns of high Inflation

ECB hikes quarter percentage points, warns of high Inflation

The European Central Bank (ECB) announced a new rate increase of 0.25 percentage points, bringing its main rate to 3.75 percent from 3.5 percent on Thursday to fight inflation.

The latest hike brings the ECB's current interest rate to 3.75 percent, a level not seen in 23 years. This decision reflects the ECB's commitment to tackling inflationary pressures that continue to pose challenges to the economy.

In a statement, the ECB expressed its determination to ensure that inflation returns to its medium-term target of two percent in a timely manner.

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The governing council emphasized that inflation, though decreasing, is still anticipated to remain at elevated levels for an extended period. In response to these economic conditions, the ECB decided to increase its three key interest rates by 25 basis points.

Following the decision, the euro fell 0.3 percent versus the US dollar, trading at $1.105. The Stoxx 600 increased by 1.2 percent, while government bond rates fell. The reactions indicate that market participants are likely to expect future rate rises in the eurozone.

In the last few months, inflation has shown some signs of cooling down in the eurozone. In June, inflation dropped to 5.5 percent, down from the 6.1 percent recorded in May.

While this decline is a positive development, it is essential to note that it remains significantly distant from the ECB's target of two percent.

Furthermore, an ECB survey revealed that business loans in the eurozone fell to their lowest level ever between the middle of June and early July.

Data on Eurozone economic activity released earlier this week showed dips in the region's two largest economies, Germany and France. The numbers fueled speculation that the eurozone would enter a new recession this year.

The International Monetary Fund forecast this week that the eurozone will grow by 0.9 percent this year, but that figure includes a 0.3 percent contraction in Germany's GDP.

Now all eyes are on the latest inflation data, which will come out next week, while the markets had expected the latest rate hike.

Questions remain about the ECB's approach for the next few months because this is the ninth straight rate hike despite a fall in inflation.

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While market participants expected the 25 basis point increase, much is still unknown regarding the ECB's post-summer strategy.

Although inflation has slowed, worries remain about whether monetary policy is dragging the region into a recession.

However, in some relief for the eurozone, the ECB did raise the possibility of a rate pause in September.


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