ECB raises interest rates to a record high

The European Central Bank raised its key interest rate by 25 basis points to 4%, a record high. This is the highest rate since the euro was first launched in 1999. The bank may not be done raising rates either, with ECB President Christine Lagarde warning that she "can't say" that rates are at a peak and that the bank will be data dependent.

Video transcript

JULIE HYMAN: Well, the European Central Bank has hiked rates again. It's its 10th consecutive move higher as it prioritizes its battle against inflation over a weakening economy. The benchmark rate now at a record high of 4% and forecasts over the Central Bank's next move flipped over the last few days with money markets shifting expectations to this quarter point hike. So it wasn't a total shock [? what ?] [? it ?] [? was ?] a bit surprised of where it was a few weeks ago even.

And I've been looking at some of the commentary this morning. First of all, Christine Lagarde, the president of the ECB, saying she can't say that rates are at a peak, and that's something that economists had been discussing. Where is the peak for the ECB just as they've been discussing where is the terminal rate here in the United States?

BRAD SMITH: Yeah, and it sounds like some of the governors would have preferred to pause as Lagarde had told that to some reporters. But at least the majority in this case agreed to move forward with this decision. And then also mentioning, of course, here that even though some of the members wanted to pause rates now, to your point, it kind of leaves open the door for where that terminal might actually stand, at least as discussed by the committee right now.

JULIE HYMAN: Yeah, I was also looking at a flash note from Evercore ISI vice chair Krishna Guha who tracks the Fed closely, and he says the key phrase of the ECB statement is, quote, based on its current assessment, the governing council considers that the key ECB interest rates have reached levels that maintain for a sufficiently long duration will make a substantial contribution to the timely return of inflation to the target.

And the ECB, we should say, is holding its press conference right now, and Christine Lagarde, among other things, is being asked about that so-called transmission mechanism, right? How do those higher rates feed through to actually getting inflation down. She talked about real estate-- residential and commercial real estate, for example, clearly responding to higher rates. So just one example--

BRAD SMITH: Yeah.

JULIE HYMAN: --of how those rates are feeding through the system.

BRAD SMITH: It seems like, in terms of how it's feeding through, they also slightly revised down their projected path for inflation excluding energy and food to an average of 5.1% in 2023, 2.9% in '24, and then 2.2% in '25.

JULIE HYMAN: And by the way, the euro is falling in the wake of this decision.