The European Central Bank has hiked interest rates by 25bps to 3.5%, meeting expectations and continuing its streak of hikes that began in July 2022.
The new headline rate is the highest for the ECB since May 2001, and comes as inflation in the bloc has decelerated faster than expected, falling from a peak of 10.6% in October 2022 to 6.1% in May.
"Inflation has been coming down but is projected to remain too high for too long," the ECB said in a statement.
The ECB also slightly increased its inflation forecasts, expecting inflation in 2023 to average 5.4% compared to a prior forecast of 5.3%, and inflation in 2024 to average 3% compared to a prior forecast of 2.9%.
It credited the rising forecast to "past upward surprises and the implications of the robust labour market for the speed of disinflation".
The central bank also slightly lowered its economic growth projections, now expecting the bloc to grow by 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.
Last week, it was revealed that the eurozone fell into recession in Q1 of this year after revisions to GDP numbers revealed growth fell by 0.1% in the first quarter of this year and last quarter of 2022.
Previous estimates had suggested that the eurozone narrowly avoided a recession with zero growth in both quarters.
Economists polled by Reuters expect the ECB to hike rates by another 25 basis points in July before pausing for the rest of the year.
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Nathaniel Casey, investment strategist at Evelyn Partners, said the decision "came as no surprise to markets" due to the ECB's forward guidance.
He noted that even though inflation has continued to fall, core inflation "remains sticky at 5.3%, only fractionally down from its March peak of 5.7%". However, as retail sales have begun to fall due to the cost of living crisis, he said: "The effects of past policy tightening is starting to feed through to activity data."
Casey added: "A further 25bps increase at the ECB's meeting in July seems likely and there is certainly the possibility for further hikes thereafter.
"This is not too dissimilar to the situation in the US, where the Federal Reserve kept its target rate unchanged at yesterday's (14 June) meeting, but policy makers on the FOMC projected a further 50bps of rate hikes over the coming months.
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Joseph Little, global chief strategist at HSBC Asset Management, said the central bank has remained "focused on sticky underlying price pressures and wage growth", adding: "The danger at this point is that by focusing on slow-moving, more lagging economic indicators, the ECB sleepwalks into an overtightening of policy."
He said: "It means that we may look back on these last few hikes of the tightening cycle as a ‘policy error'. Money and credit data, for example, are already falling dramatically, and these have been reliable leading indicators for GDP historically."
Little forecast Europe would be in a recession from the beginning of next year, with growth set to average at around zero for 2024.
He noted: "The shift toward a meaningful recession and disinflation will eventually change the policy mood, with our baseline scenario assuming that the ECB cuts interest rates materially during 2024."
