Interest rates increase by 25 basis points

The ECB has increased its main rate by a quarter percentage point, bringing it to 3.75%.

This rate hike marks the completion of a full year of consecutive rate increases in the euro zone. The ECB began this series of rate hikes in July of last year as part of its efforts to address high inflation.

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“Inflation continues to decline but is still expected to remain too high for too long,” the ECB stated in a press release.

The latest headline inflation reading shows a decrease to 5.5% in June from 6.1% in May. However, this rate is still significantly above the ECB’s target of 2%. New inflation data for the euro zone will be released next week.

Although market players were anticipating the 25 basis point rate hike, there is still speculation about the ECB’s approach after the summer. While inflation has eased, concerns remain about whether monetary policy is leading the region towards an economic recession.

The ECB did not provide any forward guidance regarding future rate moves. However, they did mention the possibility of a potential pause in rate increases in September.

During a news conference, Christine Lagarde, President of the European Central Bank, stated, “Our assessment of data will determine whether and how much progress we need to make.”

Lagarde added that her team is open-minded about future decisions and there is a chance the bank may raise or maintain rates in September, but it will not be a definitive decision.

“The Governing Council will continue to rely on data when determining the appropriate level and duration of restrictions,” the ECB stated in their press release.

When pressed by the media, Lagarde stated, “We are not going to cut.”

Carsten Brzeski, Global Head of Macro at ING Germany, commented, “What is more intriguing is that the accompanying policy statement keeps the possibility of further rate hikes wide open and does not adopt a more cautious tone.”

Neil Birrell, Chief Investment Officer at Premier Miton Investors, said in a statement, “If rates are not yet at their peak, we are approaching it, and soon the focus may shift to how long they will stay at that level.”

An ECB survey revealed that corporate loans in the euro zone have reached their lowest level ever between mid-June and early July.

Euro zone business activity data released earlier this week indicated declines in Germany and France, the two largest economies in the region. Analysts at ING Germany believe these figures increase the likelihood of a recession in the euro area this year.

This week, the International Monetary Fund predicted that the euro zone is likely to grow by 0.9% in 2022, taking into account a recession in Germany where GDP is expected to contract by 0.3%.

Additionally, the ECB announced that it will set the remuneration of minimum reserves to 0%, meaning that banks will not earn any interest from the central bank on their reserves.

Following the announcement, the euro traded lower against the U.S. dollar, declining by 0.3% to $1.105. The Stoxx 600 experienced a 1.2% jump, while government bond yields decreased.

These reactions indicate that market players are likely anticipating further rate increases in the euro zone.

Note: CNBC’s Katrina Bishop contributed to this report.

Correction: This article has been updated to reflect that the ECB raised the possibility of a potential pause in rate hikes in September.