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June 15 (UPI) — The European Central Bank increased interest rates by 25 basis points, demonstrating its ongoing battle against inflation.
The bank’s governing council stated that this rate hike is part of their efforts to ensure that inflation returns to its 2% medium-term target within an appropriate timeframe.
European Central Bank President Christine Lagarde expressed that although conditions in various sectors of the European economy are mixed, the persistence of inflation justifies another rate hike.
“Inflation has been decreasing but is forecasted to remain excessively high for an extended period,” Lagarde said in a speech following the announcement.
The eurozone’s GDP contracted by 0.1% in both the fourth quarter of 2022 and the first quarter of 2023, leading to a recession.
The decrease in government spending by 1.6% and consumer spending by 0.3% contributed to the decline in eurozone growth. However, gross fixed capital formation increased by 0.6%, while exports saw a 0.1% decrease.
The ECB acknowledged that the outlook for both inflation and growth remains uncertain, with potential risks stemming from Russia’s actions in Ukraine and increasing geopolitical tensions. These risks could fragment global trade and negatively impact the euro area economy.
The war heavily affected Europe due to its previous reliance on Russian commodities such as crude oil and grains. Lagarde stated that legacy changes in energy costs continue to contribute to inflationary pressures in the European economy.
Excluding volatile items, consumer-level inflation decreased from 5.6% YoY in April to 5.3% last month. However, this rate still exceeds the ECB’s 2% target.
Inflation is slowly decelerating, with the ECB projecting that the target rate won’t be reached until 2025. On the other hand, a growth expansion of 0.9% is expected for this year, followed by 1.5% in 2024.
Core inflation in the eurozone is comparable to levels seen in the United States, the world’s largest economy. However, without consecutive declines in GDP, the U.S. economy is outperforming Europe.
In contrast, the U.S. Federal Reserve opted to maintain their interest rates at 5% to 5.25%. This decision was influenced by data indicating a strong labor market, coupled with inflation that is approximately half of what it was in June 2022.
“By keeping the target range steady at this meeting, the committee can assess further information and evaluate its implications for monetary policy,” stated the Fed.
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