ECB raises rates again, signaling a firmer stance against inflation
The European Central Bank (ECB) met and met the expectations of a majority, delivering the largest single increase in euro-area policy rates in a span of 23 years. In a move closely watched by households and businesses, the ECB’s governing council raised the benchmark refinancing rate by 0.75 percentage points, sending the policy rate to 1.25 percent. This level marks the highest point since November 2011 and reflects a clear intent to cool demand and curb rising prices across the eurozone.
One consequence is higher borrowing costs for savers and borrowers alike. Banks will charge more for loans while also offering slightly higher interest on savings for the first time since December 2011. The central objective behind this liquidity-draining step is to dampen excess demand that could feed inflation. Christine Lagarde, the ECB president, indicated this policy path will continue in forthcoming meetings as officials balance the risk of inflation persistence with the need to support growth. The message is straightforward: policy makers expect further rate increases to restrain demand without derailing the broader recovery.
In examining the broader inflation fight, ECB officials are confronting what many describe as the most persistent inflation wave in four decades. Some influential members of the governing council, for example the German economist Isabel Schnabel, have signaled a readiness to tighten further. Others, like the Irish economist Philip Lane, have argued for a more gradual pace. The debate within the council reflects a broader divide between those who prioritize decisive price stability and those who favor a more flexible interpretation of the mandate in light of evolving economic conditions. The outcome this time leaned toward the hawkish side, reinforcing a commitment to bring inflation back to target over time.
Looking at the market reaction, a 0.5 point increase—an option that had remained on the table until recently—would have risked disappointing investors who expect strong action to curb inflation. A sharper move could have triggered heavier asset sales, increased pressure on debt markets, and weighed on European equities. With the 0.75 point hike confirmed, the ECB sends a message about its readiness to tighten further if inflation does not move toward the projected path. Yet the central bank also weighs the potential strain on the eurozone economy, acknowledging that the first signs of a possible recession are on the horizon for some economies within the block.
Variable mortgages rise, lifting monthly payments on average
As expectations adjust to higher rates, households with adjustable-rate mortgages are witnessing a noticeable increase in monthly payments. The shift in financing costs feeds into consumer budgets and can influence discretionary spending as households recalibrate savings and debt service obligations. The monetary stance aims to slow demand pressures that have fed price increases, while authorities monitor financial stability and the ability of borrowers to cope with higher financing costs.
Despite the rate rise, the ECB emphasizes that inflation dynamics remain the central concern. The bank has signaled that it will publish fresh projections shortly, refining its medium-term target of inflation near 2 percent. Earlier forecasts had anticipated a gradual inflation decline, but new projections have been revised to reflect a stronger upward trajectory in the near term, underscoring the uncertainty facing euro-area economies. The updated forecasts will inform decisions on policy settings in the months ahead.
At the same time, unemployment across the euro area has remained comparatively low, and GDP has shown resilience in the second quarter. Nevertheless, various early indicators hint at softer activity in several sectors. The ECB had previously projected growth around 6.8 percent for the year with slower gains in following years, yet subsequent outlooks show a more tempered path. The council now expects more modest growth in 2023 and a modest rebound in 2024, tempered by the risk of renewed inflation and external shocks. Some policymakers warn that any disruption to energy supply, including potential interruptions from major suppliers, could weigh on growth and push inflation higher again.