ECB raises key interest rate to 3.75%

The European Central Bank (ECB) announced a 0.25% raise on Thursday, bringing the eurozone's key interest rate to 3.75% in a bid to curb inflation.

The latest announcement slows the pace of rate hikes after the ECB had raised the key interest rate by 0.5% at its previous three opportunities. 

What did the ECB say? 

The ECB's move follows a similar announcement by the US Federal Reserve on Wednesday, which also raised borrowing costs by 0.25% — and hinted that it could soon pause raising interest rates.

While the ECB is not expected to halt its cycle of interest rate hikes, the central bank did not include an explicit commitment to future hikes in its statement this time — instead saying it would take a "data-dependent approach."

"The inflation outlook continues to be too high for too long," the central bank said in a statement.

Preliminary EU figures for inflation in the eurozone predict year-on-year inflation of 7.0% for the month of April, which would be a slight increase on March's figure of 6.9%, and is well above the ECB's target range of around 2%.

Euro area inflation had peaked at 10.6% year-on-year in October of 2022, when energy prices were at their highest and European countries were preparing for the onset of winter. The figures had been falling again gradually since then, thanks in no small part to considerable reductions in energy prices.

Despite removing its explicit warning of more impending increases, ECB President Christine Lagarde implied that her organization's work was likely not yet done. 

"Based on the information today, we have more ground to cover," Lagarde said. "We are on a journey, and we are not pausing." 

Where do the rates stand? 

The ECB raised all three of its benchmark interest rates by 0.25%. 

Its deposit rate, the interest paid to commercial banks depositing excess funds at the ECB on an overnight basis, rose to 3.25%. 

The interest rate on "main refinancing operations" (the rates the ECB charges commercial lenders for borrowing money for one week, and the most important of the three) rose to 3.75%. 

And the rates the ECB charges commercial lenders for overnight loans of capital — the marginal lending facility — rose to 4%. 

These levels are all records since 2008, when western central banks slashed interest rates to unprecedented levels near zero amid the financial crisis. 

Years trying to induce modest inflation, but now trying to control it

Since then, particularly in the eurozone, the rates had remained stagnant at or near 0 as economists tried to induce modest inflation of around 2%.

By 2022, though, a combination of the aftereffects of the COVID pandemic and Russia's invasion of Ukraine started pushing inflation well past that target, forcing central banks to start raising rates. 

Increasing interest rates is seen as a tool to combat inflation because it discourages borrowing and therefore spending. 

Already-rising goods prices started rising more sharply still in the eurozone's 20 member states following Russia's invasion of Ukraine last year, and after Moscow began slashing gas deliveries to Europe. This put further pressure on prices of core products like food and fuel in Europe.

The ECB has been aiming for medium-term price stability and an inflation rate of roughly 2% — but this target has been overshot for months.

Benchmark interest rates are different from the rates ordinary people pay or receive on their loans or their savings, but they tend to have a more or less direct impact on these rates. 

msh/rs (AP, dpa, Reuters, AFP)