Fed resorts to pause: ECB raises by 25 basis points

After 10 straight increases, the FOMC has decided to keep the fed funds rate unchanged at 5.00-5.25% at the June, 13th-14th meet. Finally, the US central bank wants the economy to adapt in accordance with steepest rise benchmark rates in decades. However, the possibility of further interest rate increase down the year is still left open (2 more rate hikes of 25 basis points each, as FOMC members raised median projection for interest rates at the end of this year by another half percentage point). The Federal Reserve again highlighted the importance of bringing down the inflation to “2%” target, since despite the Fed’s campaign of monetary tightening, annual inflation remains “elevated” above the US central bank’s long-term target, while unemployment still remains at historical low levels.

The European Central Bank (ECB) announced a increase of 25 basis points, taking its main borrowing rate to 3.5%. As per ECB, inflation is likely to stay above its 2% limit through 2025 and signaled at further rate hikes in the coming months. We expect ECB not to follow exact route as the Fed since the inflation and economy dynamics in Europe are quite different from that of US, with Eurozone inflation still hovering around 7.1% in May (down from 8.1% in April). ECB projections of headline inflation are currently set at: 5.4% this year, 3% in 2024 and 2.2% in 2025.

ECB president Lagarde mentioned that the central bank is not “satisfied” with the inflation outlook and wanted to preempt further decisions, adding that “the terminal rate is something we will know when we get there.”, clearly showing the uncertainity around robust GDP growth and high employment rate, on back of sticky inflation.

Last updated on June 25th, 2023 at 08:18 am