March 16, 2023
Effective March 16, 2023, the Governing Council took the decision to raise the three key interest rates set by the European Central Bank (ECB) by 50 basis points. As a result, starting on March 22, 2023, the interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility will all be raised to 3.50%, 3.75%, and 3.00%, respectively.
The Governing Council expects to raise interest rates further as inflation is projected to remain significantly high and is anticipated to stay above the target for too long. Keeping interest rates at restrictive levels will over time reduce inflation and ensure it reaches its medium-term target of 2% in a timely manner.
To preserve price stability and financial stability in the euro area, The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary. The euro area banking sector stands strong, with adequate capital and liquidity positions. The ECB stated that, “In any case, the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.”
The European Central Bank further highlighted the following:
“The new ECB staff macroeconomic projections were finalised in early March before the recent emergence of financial market tensions. As such, these tensions imply additional uncertainty around the baseline assessments of inflation and growth. Prior to these latest developments, the baseline path for headline inflation had already been revised down, mainly owing to a smaller contribution from energy prices than previously expected. ECB staff now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. At the same time, underlying price pressures remain strong. Inflation excluding energy and food continued to increase in February and ECB staff expect it to average 4.6% in 2023, which is higher than foreseen in the December projections. Subsequently, it is projected to come down to 2.5% in 2024 and 2.2% in 2025, as the upward pressures from past supply shocks and the reopening of the economy fade out and as tighter monetary policy increasingly dampens demand.”
“The baseline projections for growth in 2023 have been revised up to an average of 1.0% as a result of both the decline in energy prices and the economy’s greater resilience to the challenging international environment. ECB staff then expect growth to pick up further, to 1.6%, in both 2024 and 2025, underpinned by a robust labour market, improving confidence and a recovery in real incomes. At the same time, the pick-up in growth in 2024 and 2025 is weaker than projected in December, owing to the tightening of monetary policy.”
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