European Central Bank President Christine Lagarde attends a hearing of the European Parliament’s Committee on Economic and Monetary Affairs in Brussels, Belgium, on November 28, 2022.
Thierry Monasse | Getty Images News | Getty Images
The European Central Bank chose to cut its key interest rate from 1.5% to 2% at its meeting on Thursday.
It also said it would start reducing its balance sheet by an average of €15 billion ($16 billion) per month from the beginning of March 2023 until the end of the second quarter of 2023.
It announced details of a reduction in its Asset Purchase Program (APP) holdings in February, and said it would regularly reassess the pace of decline to ensure it is consistent with monetary policy strategy.
The widely expected 50 basis point rate hike is the fourth rate hike by the central bank this year.
Rates moved out of negative territory for the first time since 2014, raising rates by 75 basis points in October and September and by 50 basis points in July.
In a statement, the ECB said: “The Policy Board has decided that interest rates should remain at a steady pace to reach sufficiently restrictive levels to ensure a timely return to the 2% medium-term target. We are determined that it must go up significantly,” he said.
“We are not pivoting”
At a press conference following the announcement, ECB President Christine Lagarde said: Compared to the Federal Reserve (Fed), we have more room to cover.
“We are not slowing down. We are in the long game.”
The central bank said it was working on a “significantly revised upward” eurozone inflation forecast and expected inflation to remain above its 2% target through 2025.
Average inflation is now expected to be 8.4% in 2022, 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025.
But he sees a recession in the region as “relatively short-lived and shallow.”
This comes after the latest Eurozone inflation data showed a slight slowdown in 2018. The price will go up in November, but the rate will remain at 10% per annum.
Lagarde told CNBC’s Annette Weisbach: “In addition to rate hikes, one of the key messages is that, as I said earlier, we need to continue to raise rates, not just higher rates. That’s what I’ve decided.
“Based on the data available to date, it is clear that a large steady rise in interest rates would mean that interest rates would need to be raised at a pace of 50 basis points for a period of time.
Regarding the quantitative tightening announcement, she said the ECB wants to follow predictable and measurable principles.
Lagarde said the decision to cut an average of 15 billion euros at APP over four months represents about half of the redemptions in that period, with market teams, all central banks and others involved in the decision making. It was based on advice from officials. .
“Keeping in mind that the key tool is interest rates, the numbers seemed appropriate to normalize the balance sheet,” she added.
The ECB achieves the cut by not reinvesting all principal payments from matured securities in its €5 trillion bond portfolio.
After the announcement, the euro rose from a 0.5% decline to a 0.4% gain against the dollar, while European stocks in the Stoxx 600 Index plunged 2.4%.
hawk’s message
US Federal Reserve Wednesday The Bank of England and the Swiss National Bank raised key rates by half a percentage point, as they did on Thursday morning.
“In contrast to the Bank of England, this is a hawk’s hike. [quantitative tightening] And a definitive start date,” said an analyst at BMO Capital Markets.
However, they noted that the ECB has lagged behind other central banks in shrinking its balance sheet and will continue to reinvest under its pandemic emergency purchase program.
“There is an operational feel to the wording of the statement, with banks leaving the QT trail unrestricted,” they wrote in a note.
Antoine Bouvet, senior rates strategist at ING, also described the announcement as “hawkish.”
“The main lesson learned from this meeting is that inflation expectations are higher than expected and the ECB needs to raise interest rates more than the market expects,” he said.
“Lagarde clearly guided the market to expect another 50 basis point rate hikes in February and March and opposed the idea that rates could be cut any time soon. I think there is a whole curve.”
“The QT announcement was more specific than I expected due to its size and early start date. It’s worth remembering that net supply is increasing, and this will be true for all countries next year after the ECB’s intervention,” he said in an email.