The European Central Bank (ECB) made a significant move on Thursday by increasing key interest rates by 25 basis points. While the ECB acknowledged a decline in inflation, it also cautioned that price pressures still persist. In a statement, the ECB highlighted that although inflation is continuing to decrease, it remains expected to remain too high for an extended period. Emphasizing their commitment, the Governing Council declared their determination to ensure that inflation returns to its targeted 2% medium-term level in a timely manner.

Market Expectations and Forecasts

Prior to the meeting, market participants were divided on the prospects of an interest rate hike. However, with reports from Reuters stating that the ECB staff would raise their inflation forecast for this year and next, while simultaneously lowering the growth forecast, expectations shifted in favor of further tightening.

The ECB staff’s updated forecasts for the euro area foresee average inflation rates of 5.6% in 2023, 3.2% in 2024, and 2.1% in 2025. These revisions indicate an upward adjustment for 2023 and 2024 but a downward revision for 2025. The higher path for energy prices was the primary driver behind the upward adjustments for 2023 and 2024. Conversely, the staff significantly downgraded their growth projections for the eurozone, anticipating an expansion of 0.7% in 2023, 1% in 2024, and 1.5% in 2025.

Continued Rate Hikes and President Lagarde’s Role

This latest decision by the ECB marks the tenth consecutive interest rate increase. Leading this effort is President Christine Lagarde, who will hold a news conference following the announcement at 2:45 p.m. Frankfurt time.

Internal Debate and Economic Conditions

The decision to raise rates was not without internal debate within the ECB. Economists at ING anticipated a fierce discussion due to the balancing act between lingering core inflationary pressure and evidence of deteriorating economic conditions across the euro area. The HCOB eurozone composite PMI fell to a 33-month low of 46.7 in August, indicating worsening conditions. Furthermore, Eurozone GDP for the second quarter was revised downward, revealing minimal quarter-on-quarter growth of 0.1%.

—Steve Goldstein contributed.

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