European Central Bank raises rates by 25 basis points, slowing the pace of hikes

European Central Bank raises rates by 25 basis points, slowing the pace of hikes

Christine Lagarde, President of the European Central Bank (ECB), announced a new rate decision Thursday following new inflation data.

Caisa Rasmussen | Afp | Getty Images

The European Central Bank on Thursday increased its benchmark interest rate by 25 basis points as it continues to fight a surge in consumer prices, with rates now at levels not seen since November 2008.

The decision comes after inflation figures released earlier this week showed an increase in the headline rate to 7% for April. At the same time, core inflation, which excludes food and energy prices, decreased slightly to 5.6%.

The central bank embarked on its current hiking path in July 2022, when it brought its main rate from -0.5% to zero. However, despite consistent rate increases since, inflation remains well above the ECB’s target of 2%. Estimates published last week by the International Monetary Fund suggest that inflation will not reach the ECB’s target until 2025.

Recent data also shows that the euro zone economy grew less than expected in the first quarter of the year, registering an anemic GDP of 0.1%. However, unemployment numbers showed a slight improvement in March from the previous month at 6.5%.

Furthermore, a recent ECB survey showed that banks have significantly tightened access to credit, which could suggest that higher interest rates have started to take its toll on the real economy.

The Federal Reserve on Wednesday said it was increasing rates by 25 basis points, bringing its funds target range to 5-5.25%, the highest level since August 2007. The central bank also suggested it could be close to pausing rate hikes.

The two central bank decisions come at a time when pressures on the banking sector, particularly stateside, have not dissipated. Earlier this week, JPMorgan announced its acquisition of First Republic, a smaller lender that has struggled to survive during the higher interest rate environment.

The CEO of Unicredit, an Italian bank, told CNBC Wednesday that he’s expecting more bank rescues in the U.S.. These stresses in the banking sector could give further ammunition to dovish central bankers, amid wider concerns about the implications of higher rates on the real economy.

This is a breaking news story and it is being updated.

(With Inputs from cnbc)

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