ECB raises interest rates by 25 basis points

European Central Bank on Thursday raised interest rates for the ninth time in a row by 25 basis points, saying that inflation is still expected to remain too high for a very long time despite the recent slowdown.

This raised the central interest rate on major refinancing operations to 4.25%, the highest rate since October 2008, and the rate on deposit facilities rose to its highest level in 22 years at 3.75%.

Since the start of the central bank’s tightening cycle in July 2022, ECB officials have implemented an unprecedented 425 basis points increase in interest rates, marking the fastest pace of tightening in its history.

This sharp rise in rates could have severe effects on loan growth in the Eurozone and thus on economic activity. As the European Central Bank said in a quarterly survey on Tuesday: “Net corporate loan demand fell strongly in the second quarter of 2023, to its lowest level ever since the survey began in 2003.”

Banks play a dominant role in financing the economy in the eurozone because capital markets are not as fluid and deep as in the United States. ECB Chief Economist Philip Lane said in early July that the ECB was seeing its tighter monetary policy take effect – particularly through bank credit.

New data over the past few days showed that business activity in the eurozone contracted much more than expected in July. Factory output has fallen at the fastest rate since the coronavirus first slowed the economy, and demand has contracted in the service industry in the bloc as consumers grapple with soaring inflation. The German “Ifo” index also fell more than expected recently.