The European Central Bank (ECB) is determined to ensure a timely return to its 2% inflation target as it outlined Thursday in its latest decision to raise three key interest rates by 25 basis points (bps). The move, which is the central regulator's smallest since hiking began in July 2022, is a step towards curbing persistent inflation in the eurozone, and follows the U.S. Federal Reserve’s 25 bps decision on Wednesday.

At the same time, ECB president Christine Lagarde made it clear that the regulator is not pausing, and that more work needs to be done to reach the target, dismissing any relation to the decision of the Fed. The euro area’s monetary authority further indicated that future rate hikes are possible, with Lagarde admitting some governors were even in favor of a bigger adjustment this time.

The interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility will be increased to 3.75%, 4.00% and 3.25% after May 10, 2023. The regulation identified the “high” headline inflation, along with persistent price pressures and “significant upside risks” to future inflation, as the primary factors which lead to the decision.

Inflation in the euro area has remained high despite the efforts of the ECB to bring it back under control. Despite the uncertainties of what the upcoming results will be, the regulator is committed to maintaining a “sufficiently restrictive” monetary policy for as long as necessary.

Thus, the hike in rates is a necessary part of the ECB’s fight to harmlessly reach the desired inflation level, with future rate hikes likely to be expected. It allows them to position the markets with the clear message that its commitment to the inflation target remains strong and that the current rate is far from what its perceives to be “sufficiently restrictive” in the long run.



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