The European Central Bank increased the main refinancing rate by 25 bps, as expected, to 4%. Marginal lending rate was increased to 4.25% and deposit facility rate was increased to 3.5%. The practice of reinvesting redemptions arising from the asset purchase program will be terminated as of July.
If we look at the ECB statements;
Borrowing costs have increased rapidly and loan growth is slowing. Tighter financing conditions are the main reason for inflation to fall further towards the target as it is expected to gradually reduce demand.
Therefore, together with the guidance in the ECB policy text, it refers to the effects of interest rate hikes on the economy. From this perspective, it can easily be concluded that the ECB is approaching the end of its rate hike cycle. On the other hand, we see that there are still some reservations within the framework of economic projections.
In the economic projection update part, inflation expectations for 2024 and 2025 were revised from 2.9% to 3% and from 2.1% to 2.2%, respectively. In response, the ECB slightly lowered its economic growth projections for this year and next. The bank expects the economy to grow by 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.
Before making reference to Lagarde's speech, we see that the pricing in the market highlighted the rate hikes in July and September. A possible move in July may also have the potential to be a double dose, currently 3.75% is fully priced in. If there is another rate hike in September, the ECB may try 4% as a terminal rate.
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Hibya Haber Ajansı
