The ECB delivered its seventh successive tightening today but, in line with the market consensus, less aggressively than in March. A 25 basis point increase followed 50 basis point hikes at each of the previous three meetings and fully 75 basis points last October. The latest move puts the key deposit rate at 3.25 percent, matching its highest level since May 2001, the refi rate at 3.75 percent and the rate on the marginal lending facility at 4.0 percent. The decision to slow the pace of tightening will probably be seen as a signal that the peak to interest rates is not too far away although there was no forward guidance on what to expect at the next meeting in June.

There was also a change made to QT. Currently, maturing assets in the Asset Purchase Programme (APP) are running off the balance sheet at an average rate of €15 billion a month will continue to do so through the remainder of the quarter. However, as of July, partial reinvestment will be terminated, ensuring that the disposal rate will roughly double. This was probably a nod to the ECB's hawks who will have pressed for a larger increase in key rates. Meantime, the Pandemic Emergency Purchase Programme remains outside of QT with full reinvestment still scheduled until at least the end of 2024.

The policy statement notes that in general incoming information had broadly supported the assessment of the medium-term inflation outlook that the Governing Council formed at its previous meeting. This showed both headline and core inflation remaining above the 2 percent target throughout the forecast horizon and so suggests that yet more rate hikes could still be in the pipeline. Upcoming inflation and labour market data will be vital.

To be sure, despite today's less aggressive tightening, the bias to ECB policy remains firmly tilted toward higher interest rates. With headline (7.0 percent) and core (5.6 percent) inflation still so far above target, the Governing Council's hawks will no doubt have wanted another 50 basis point hike today and will probably want to make up the shortfall in June. They may also call for a more significant pick-up in the pace at which the central bank's balance sheet is shrunk next quarter. In any event, should the Federal Reserve now be on hold as some think very likely, prospective shifts in interest rate differentials should work in favour of the euro. And a stronger exchange rate would not trouble an ECB that will welcome any development that helps it to get inflation back under control.

Despite global banking worries, the European Central Bank in March stuck to its guidance and raised rates by a full 50 basis points. There was no forward guidance for May's meeting but the consensus is a 25 basis point hike with 50 basis points seen as the most likely alternative.

The European Central Bank (ECB) sets monetary policy for all members of the Eurozone. The highest decision-making body is the Governing Council which comprises the six members of the Executive Board and the nineteen presidents of member central banks. Policy meetings take place roughly every six weeks but, due to the sheer number of participants, a rotation system has been introduced so that the total number of votes is capped at twenty-one. The benchmark interest rate is the rate on the main refinancing operations (refi rate) which sits between the marginal lending facility rate and deposit rate. The ECB's primary objective is price stability which since July 2021 is based upon a symmetric 2 percent target for the annual inflation rate.

The European Central Bank determines interest rate policy at their Governing Council meetings. The Council is composed of the six members of the Executive Council and 17 presidents of member central banks (Bank of France, Bundesbank, etc). The Governing Council meets now meets every six weeks. The European Central Bank had an established inflation ceiling of just less than 2 percent which was modified in July 2021 to 2 percent. The ECB's measure of inflation is the harmonized index of consumer prices (HICP). Each member of the Governing Council has one vote and decisions are reached by simple majority. In the event of a tie, the President has the casting vote. Only short-form minutes are released so how individual members voted is not known.

As in the United States, European market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on European markets can be dramatic and far-reaching. The rate set by the ECB serves as a benchmark for all other interest rates in the Eurozone.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.