The European Central Bank announced yesterday its decision to raise interest rates by half a percentage point, bringing the rate on main refinancing to 3.50% (the highest level since October 2007), the deposit rate to 3%, and the marginal lending rate to 3.75%. The ECB also estimates that inflation will average 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025.

"Inflation is expected to be too high for too long a period of time. Therefore, the Governing Council decided today to raise the three key interest rates by 50 basis points, in line with its determination to ensure a timely return of inflation to its medium-term objective of 2%," said Christine Lagarde, President of the Central Bank, at a press conference in Frankfurt, making it clear that "no other option" other than the hike has been put on the table, And "the decision was taken by a large majority and very quickly."

"The Governing Council is closely following the ongoing market tensions and stands ready to intervene where necessary to preserve price stability and financial stability in the euro area," he continued, adding that the euro area banking sector is resilient, with strong capital and liquidity positions. "In any case, the ECB has all the necessary instruments to provide liquidity to support the euro area financial system, if the need arises, and to preserve the orderly transmission of monetary policy. The ECB's new staff macroeconomic projections were finalised in early March, ahead of recent tensions in financial markets. These tensions therefore lead to further uncertainty regarding the assessments of the baseline scenario for inflation and growth."

"According to the latest projections, the economy should recover over the next few quarters. Public interventions to protect the economy from the impact of high energy prices should be temporary, targeted and modulated in order to preserve incentives for lower energy consumption. Any measure that fails to meet these criteria is likely to push up medium-term inflationary pressures, necessitating a stronger monetary policy response." In general, she continues, "fiscal policies should be geared towards making our economy more productive and gradually lowering the high level of public debt." ECB President Christine Lagarde said this at a press conference in Frankfurt.

The Governing Council stands ready to adjust all its instruments within its mandate to ensure that inflation returns to its medium-term 2% objective and to preserve the orderly transmission of monetary policy. Even if the uncertainty eases, we know we still have a long way to go in the fight against inflation." As for the banking sector, "it is in a much better situation than in 2008", he notes, and "we do not currently see a liquidity crisis", but on the contrary "we are beginning to see the transmission of our monetary policy through the credit channel", that is, a slowdown in financing to firms and households, "and that is exactly what we want to see".

The crisis that has hit Credit Suisse is "limited and there is no concentration," Central Bank Vice President Luis De Guindos explained at the conference. In any case, "we have the tools to provide liquidity in case they are needed".

Core inflation, i.e. excluding energy and food, continued to rise in February and ECB staff expect an average of 4.6% in 2023, higher than anticipated in the December projections. It is expected to decline to 2.5% in 2024 and 2.2% in 2025 thereafter as upward pressures from past supply shocks and the reopening of economic activities fade and tighter monetary policy increasingly dampens demand. "These improvements are but not yet sufficient to guarantee a return to the 2% target in the medium term," says Lagarde.

"I think there isno compromise to be made between price stability and financial stability," the ECB president replied to a question asked at a press conference. In any case, the ECB did not include in the communiqué on today's rate hike decision any reference to further future hikes.