As widely anticipated, the ECB today announced its ninth interest rate hike in as many meetings. Matching the market consensus, a 25 basis point increase lifted the deposit rate to 3.75 percent, a record high, the refi rate to 4.25 percent and the rate on the marginal lending facility to 4.50 percent. In line with the June statement, there was no clear forward guidance on rates but, if anything, the tone may be seen as marginally less hawkish than before. Today's decision was unanimous.

The bank confirmed that the policy of partial reinvestment of maturing assets held under the Asset Purchase Programme (APP) concluded at the end of last month. However, net asset sales (active QT) have not yet been discussed. It also re-affirmed its commitment to reinvesting the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP) until at least the end of 2024.

The ECB noted that developments since the last meeting supported the expectation that inflation would drop further over the remainder of the year but stay above target for an extended period. It also pointed out that financing conditions had tightened again and were increasingly dampening demand, which it sees as an important factor in bringing inflation back to target. The outlook for the real economy had deteriorated. In sum, there were no surprises here.

The Governing Council (GC) also decided to set the remuneration on minimum reserves at 0.0 percent. Previously it was aligned with the deposit rate (now 3.75 percent), meaning an increasing cost to the bank as interest rates have risen. The bank sees the move as helping to ensure the full pass-through of the interest rate decisions to the money markets.

The next policy meeting is scheduled for 14 September and prior to the release of a mixed, but generally softer than expected, June HICP report, GC hawks were typically calling for yet another hike in interest rates at that meeting too. However, recent official comments have been less aggressive and at this stage the September outcome is far from clear. Inevitably, the flash July and August inflation reports (due next Monday and 31 August respectively) will be key. Favourable data here could well mean that the tightening cycle has finally run its course.

The ECB is expected to hike rates for a ninth straight meeting, by 25 basis points for the refi rate to 4.25 percent. Inflation remains stubbornly high especially service sector prices which accelerated further in June from 5.0 percent to 5.4 percent.

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.