European Central Bank hikes interest rates up a notch further

The European Central Bank (ECB) has raised interest rates an additional 25 basis points, while ensuring that the Governing Council’s future decisions will ensure that key interest rates will be set at sufficiently restrictive levels for as long as necessary.

The decision by the ECB came a day after US Federal Reserve also raised interest rates to a 22-year high in a bid to clamp down on excessive inflation, and two days after the UK Bank of England also raised interest rates.

The ECB’s new interest rates are set to come into effect from 2nd August 2023.

It will result in the deposit facility interest rate rising to 3.75 per cent and marginal lending to 4.5 per cent. Refinancing operations will see an increase to 4.25 per cent.

Developments since the last meeting held by the Governing Council supported the expectations that inflation was to drop further over the remainder of the year, but was however expected to remain above the target two per cent rate for an extended period.

“The past rate increases continue to be transmitted forcefully: financing conditions have tightened again and are increasingly dampening demand, which is an important factor in bringing inflation back to target,” read the report by the ECB.

The Governing Council also decided to set the remuneration of minimum reserves to zero per cent. The decision was taken to preserve the effectiveness of monetary policy by maintaining the current degree of control over the monetary policy stance and ensuring the full pass-through of the interest rate decisions to money markets.

It was also said that the decision will improve the efficiency of monetary policy by reducing the overall amount of interest that needs to be paid on reserves in order to implement the appropriate stance.

Currently, Malta has the lowest pass-through rate in the euro area.

What this effectively means is that, going forward, the minimum reserves bank need to hold won’t receive any interest.