The European Central Bank (ECB) on Thursday (16 March 2023) raised interest rates by 50 bps, in order to ensure the timely return of inflation to the 2% medium-term target.
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 3.50%, 3.75% and 3.00% respectively, with effect from 22 March 2023.
This latest interest rate hike will push borrowing costs to reportedly the highest level since late 2008.
The ECB said that the Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area. The euro area banking sector is resilient, with strong capital and liquidity positions.
The ECB staff now sees inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. At the same time, underlying price pressures remain strong.
Core inflation, i.e., 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.
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 expects 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.
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