To the surprise of no one, the ECB today delivered its eighth successive tightening. Key interest rates were hiked a further 25 basis points, in line with the market consensus and lifting the deposit rate to 3.50 percent, the refi rate to 4.00 percent and the rate on the marginal lending facility to 4.25 percent. There was no clear forward guidance on rates but new economic forecasts and the language of the policy statement suggest that the bias remains in favour of further tightening. The bank also confirmed that the current programme of partial reinvestment of maturing assets held under the Asset Purchase Programme (APP) will conclude at the end of this month.

Note too that the impending step-up in the pace of balance sheet reduction will be compounded by the repayment of earlier targeted longer-term refinancing operations (TLTROs). Through the end of next year, the combined hit to liquidity is likely to be in excess of €1.6 trillion with the first major drain being the €476.8 billion of maturing loans due on 28 June. Excess liquidity is still so high that these withdrawals, which have been well flagged, should not have a significant impact on financial market stability. Even so, there may be some nerves about the position of some smaller banks, particularly in Greece and Italy. Meantime, the Pandemic Emergency Purchase Programme remains outside of QT with full reinvestment still scheduled until at least the end of 2024.

The updated economic projections show both headline and core inflation above 2 percent through 2025, implicitly conceding that policy is still not restrictive enough. The yearly average rates are 5.4 percent, 3.0 percent and 2.2 percent for overall inflation and 5.1 percent, 3.0 percent and 2.3 percent for the underlying gauge. The upward adjustment to the core profile reflects earlier upside surprises and a surprisingly strong labour market. However, at the same time, the growth outlook has been marked down and for the same years now stands at 0.9 percent, 1.5 percent and 1.6 percent.

In her press conference, President Lagarde effectively flagged another rate hike at the next ECB meeting in July. However, with the Eurozone economy already in recession, the region's ECDI consistently sub-zero since late-March and core inflation actually surprisingly low last month, the GC's hawks may find a less receptive audience. It is too early to be confident that policy is now working as desired but if the June HICP report is as well behaved as the May edition, one more 25 basis point hike might be enough to bring the tightening cycle to an end.

The European Central Bank, fighting against stubbornly high underlying inflation, is expected to raise rates by 25 basis points. This would follow a 25-point move in May that followed three consecutive 50-point moves and before that back-to-back 75-point hikes.

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.