ECB Raises Deposit Rate by 25bps Amid Inflation Concerns
The European Central Bank (ECB) has increased interest rates by 25 basis points to bring its deposit rate to 2.5%. This move is seen as an 'insurance' hike, aimed at staying ahead of inflationary pressures and preventing higher energy prices from feeding through to the broader economy.
The recent escalation in the Middle East and surge in oil prices have strengthened the case for a rate increase, despite other inflation measures suggesting minimal second-round effects. The ECB's staff projections show inflation remaining unchanged at 3% this year, with revisions upwards for 2027 and 2028 to 2.5% and 2.1%, respectively.
The decision to hike rates was seen as a no-brainer by many, especially given the upward revision in growth forecasts to 0.9% this year and 1.4% in 2027 (and 1.5% in 2028). However, going further would mean that the ECB sees restrictive monetary policy as necessary, which raises questions about its willingness to risk a recession to tackle what is still considered a textbook supply-side shock.