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ECB Raises Rate to 2.25%, Sees No Tightening Cycle Ahead
The ECB raised its deposit rate to 2.25%, citing the war's impact on inflation; it signalled no tightening cycle. Growth forecasts were revised down, and the euro's reaction was muted.
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The European Central Bank raised its deposit rate by 25 basis points to 2.25% on June 11, a decision backed unanimously by the Governing Council. ECB President Christine Lagarde said the move was based on updated Eurosystem projections that showed a higher inflation path, driven by the war in the Middle East and its pass-through to energy prices.
The rate increase was more than a precautionary move, Lagarde told reporters. In all four scenarios modeled by the ECB (baseline, adverse, severe, and a new milder variant), the hike was the correct policy call. That made the decision unavoidable.
When asked whether this marks the start of a tightening cycle, Lagarde held back. Future decisions depend on how medium-term inflation expectations develop, she said, pointing to the analytical framework she proposed in March. The framework sets two categories: a limited shock the ECB can look through and a larger shock requiring a well-calibrated adjustment. A sustained deviation from the inflation target would call for a forceful response, Lagarde said. She described the 25-basis-point hike as a well-calibrated adjustment, not the start of a forceful cycle.
The market took the message in stride. Germany's ten-year Bund yield edged down to around 3.03% by the end of the press conference, reflecting expectations that the ECB had delivered what was priced. It signaled no urgency to tighten further.
For the euro, the initial reaction was subdued. The EUR/USD pair traded in a narrow range, with investors focused on the lack of a clear tightening bias and the widening rate differential with the dollar.