DWS: ECB raises interest rate with 25 basis points, inflation remains above 5%

DWS: ECB raises interest rate with 25 basis points, inflation remains above 5%

May 3, 2023

Interest Rates ECB
ECB (5).png

Inflation data released yesterday suggest that the European Central Bank may decelerate the pace of its key rate hikes to 25 basis points on Thursday. The deposit rate would then rise from 3% to 3.25%.

Admittedly, the inflation rate is still far too high. It rose to 7.0% in April 2023 from 6.9%. For the first time in several months, however, the core rate fell from 5.7% in March to 5.6%. However, the all-clear cannot be given here, because according to our calculations, the core rate is likely to remain well above the 5 percent mark in the coming months. 

On the other hand, the data on lending and credit conditions show that the ECB's more restrictive monetary policy is transmitting into the real economy. After credit standards were already tightened in the last quarters, they increased again in the April survey.

In addition, banks expect a further sharp decline in demand in the coming months. Moreover, the share of rejected loans is also rising. All this suggests that the majority of ECB members are likely to feel more comfortable with a smaller increase in key interest rates. However, this should not be confused with a faster end to rate hikes. The ECB remains data-dependent and further rate hikes are likely to remain in the pipeline.  It is likely to reiterate this at the ECB meeting on Thursday.

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