European Central Bank Raises rates to 22-Year High, Diverging from Fed
📌The European Central Bank (ECB) has announced an increase of 25 basis points for its main interest rate to 4%, diverging from the U.S. Federal Reserve’s decision to pause its own rate hikes and maintain its rates at 5.25%. The ECB has been raising rates since July 2022 to tackle high inflation levels in the region. Although the latest inflation reading showed a cooling trend, with headline inflation at 6.1% and core inflation at 5.3% in May, these figures remain significantly above the ECB’s 2% target.
📌While the market anticipated the ECB’s decision, there is still uncertainty regarding the bank’s future actions beyond the summer. The ECB stated that its future decisions will aim to bring interest rates to sufficiently restrictive levels to achieve a timely return of inflation to the 2% target. The bank raised its inflation expectations for this year and the next, now anticipating headline inflation at 5.4% in 2023, 3% in 2024, and 2.2% in 2025.