ECB Raises Key Rates Again Amid High Inflation, But Economic Outlook Remains Gloomy

The ECB raised its key interest rates by 25 basis points, with the deposit facility rate increasing to 3.75%. This was decided by a majority of members to signal determination to bring inflation back to the 2% target.

Economic growth has weakened substantially recently and is expected to remain subdued. However, a gradual recovery is still foreseen thanks to rising wages and a strong labor market.

Inflation remains too high, although there are tentative signs it may be peaking. Risks remain, especially from potential energy supply shocks. Bringing inflation back to target by end-2025 remains achievable but challenging.

There are increasing signs monetary policy transmission is proceeding strongly, more so than expected, implying significant policy tightening still in the pipeline.

The decision to raise rates was a close call, with the risks of tightening too much versus too little now more balanced. Key rates are now seen as being in a range consistent with timely return of inflation to target.