Tag: Interest Rates

Today, in an unanimous decision, the ECB’s (European Central Bank) Governing Council voted to keep its Benchmark deposit facility rate on hold at 2.25%. The main financing operations rate and the marginal facility were also held steady at 2.4% and 2.65% respectively*. After last month’s rate hike of 25 basis points, experts suggest that a rate increase is on the table at the governing councils next interest rate meeting on September 13th – 14th in Frankfurt main. 

*ECB Interest Rates – The ECB has three interest rates; the Key Deposit Rate is the interest rate banks receive when they deposit money overnight with the ECB. The other two facilities are the Main Refinancing Operations, which is the rate the banks pay when they borrow money from the ECB for one week, and the Marginal Lending Facility is the rate banks pay when they borrow money overnight from the ECB.

Indeed, after the interest rate announcement, ECB President Christine Lagarde announced that there could be a possible rate hike in September having rejected a move to increase rates today. She went on to say, “we were positioned adequately  to wait and be very attentive in the next few weeks to the development of the situation and to the data that we will be receiving in the next few weeks”. Although the decision was unanimous, President Lagarde noted that there were some governors who asked themselves whether we should consider a hike in interest rates. 

As the ECB held their meeting, crude oil prices once again hit the $100p/bl mark for the first time since March this year after Iranian backed Houthi militia claimed responsibility for attacking two Saudi Arabian tankers in the Red Sea, which will create further disruption in the supply of crude oil. President Lagarde has referred to the Houthi attack as an alarming warning that inflation projections could be higher than expected, but pointed out that the ECB was well positioned to navigate the uncertainty caused by the present conflict.

President Lagarde also pointed out that the central bank has yet to see signs of second-round inflation effects*. Indeed, the President added that if the bank were only concerned about second-round effects, the ECB would have today hiked interest rates, and she was quoted as saying, “ we are not at that stage where we’re seeing those emergent signs of second-round effects”. Experts suggest that the September meeting is considered the natural point to deliver a rate increase as there will be more economic data, including inflation for two months and various business surveys.

*Second Round Effects – In these scenarios, second round effects are price and wage-settings stemming from the current shock that have the potential to raise Eurozone inflation beyond the near-term in a persistent manner.

Indeed, analysts advise that the swaps market implies that a 25 basis points increase in interest rates is a near certainty with financial markets fully pricing in a further increase in interest rates in December. Lagarde finished by noting that “the full effects of the energy shock have yet to play out, however energy price inflation had declined in June that it had risen since the start of the conflict and its impact on food, goods, and services is likely to keep inflation well above target into 2027”.

Today, the ECB (European Central Bank) voted in an unanimous decision to hike its key deposit interest rate by 25 basis points from 2.00% to 2.25%, with data confirming this is the first rate increase by the ECB since September 2025. The ECB also raised its main refinancing operations rate to 2.40% and their marginal lending facility rate to 2.65%, the difference in these three rates are explained below*. 

*ECB Interest Rates – The ECB has three interest rates; the key deposit rate is the interest rate banks receive when they deposit money overnight with the ECB. The other two facilities are the main refinancing operations, which is the rate banks pay when they borrow money from the ECB for one week, and the Marginal Lending Facility, which is the rate banks pay when they borrow money overnight from the ECB.

The interest rate hike came as no surprise to financial markets, with experts advising this move had been telegraphed by the ECB for quite some time. This decision is a clear reversal of the monetary easing approach taken by the ECB throughout most of last year, and analysts advise it is mainly due to energy prices rising by 10.90%, driving headline inflation to 3.20% in May (up from 3.00% in April). As data reveals, it is the highest since September 2023. Furthermore, core inflation (not including food and energy) hit 2.50% in May up from 2.20% in April, showing that it is not only energy prices that are being impacted from the USA/Iraq/Israel conflict.

The policymaker responsible for the ECB’s market operations, Isabel Schnabel, according to officials, was the board member who made her point most forcefully beforehand to raise interest rates today. She said whether or not a peace agreement in the Middle East occurs now, the duration of the current conflict and how the broader economy was reacting to increased energy prices, should force the ECB to raise interest rates. Schnabel also went on to say that inflation in the eurozone could hit 4.00% by the end of the year.

At a press conference, ECB President Christine Lagarde said, “We are beginning to see a broadening of inflation throughout the economy, and that is obvious in terms of direct effect – not yet at this point in front of the second round effects*, but we are going to be extremely attentive”. The President went on to say that, “Our discussions were predicated on, obviously the major energy shock that we have observed since the beginning of March, that is enduring longer than expected by geopolitical experts, and which we are beginning to see broadening throughout the economy”.

*Second round effects – In these scenarios, second round effects are price and wage-settings stemming from the current shock that have the potential to raise Eurozone inflation beyond the near-term in a persistent manner.

President Lagarde has kept her options open regarding further interest rates, and financial markets are predicting that the ECB may raise interest rates a further two or three times by the end of 2026. Traders are currently pricing in a deposit rate reaching up to 2.75% with swap markets heavily pricing in another 25 basis point increase.

Yesterday, and for the third straight meeting, the Governing Council of the ECB (European Central Bank) voted unanimously to keep their key benchmark deposit rate steady at 2.00%. Financial markets were expecting a rate hold, as the ECB kept their three key interest rates* at their lowest level for more than two years. However, sentiment within the governing council is changing as growth is weakening on the downside and price pressures are building on the upside.

*ECB Interest Rates – The ECB has three interest rates, one being the key deposit rate, which as mentioned above was held at 2.00% and is the interest rate banks receive when they deposit monies overnight with the ECB. The other two facilities are the Main Refinancing Operations (rate held at 2.15%) which is the rate the banks pay when they borrow monies from the ECB for one week, and the Marginal Lending Facility (rate held at 2.40%), which is the rate banks pay when they borrow monies overnight from the ECB.

Indeed, officials noted that policymakers within the ECB will probably vote to increase interest rates at their next meeting in June, unless the crisis in the Middle East abates and there are some positive developments on energy prices. Those close to the ECB’s decision, while asking for anonymity, noted that there was little chance of avoiding a rate hike in June, but stressed that the situation is fluid and can change quickly.

President of the ECB, Christine Lagarde, said, “the next six weeks will be the right time to assess the economy in order to make an informed decision on verified and revisited information”. The president went on to say, “we made an informed decision on the basis of yet insufficient information. We debated the decision that we have unanimously taken today, but we also debated at length, and in depth, a decision to possibly hike”.

Experts advise that officials from the ECB have not been convinced from data received the need to tighten monetary policy, with the increasing prices of energy such as oil and natural gas yet to trigger “second round effects”*. In a statement issued by ECB officials, they said, “the upside risk to inflation and the downside risks to growth have intensified. The Governing Council remains well positioned to navigate the current uncertainty”.

*Second Round Effects – In these scenarios second round effects are price and wage-settings stemming from the current shock that have the potential to raise Eurozone inflation beyond the near-term in a persistent manner.

Analysts advise that financial markets suggest that ECB officials will prioritise an upswing in prices (by 3% in April), which are suffering negative effects from the USA/Iran/Israel crisis. Traders have accordingly priced in 75 basis points rise in interest rates by the end of the year. President Lagarde noted that, “there is one element that is going to have a real impact, and that is the duration of the conflict”.