ECB hikes rates, forecasts significant hikes ahead as it announces plan to shrink its balance sheet

European Central Bank President Christine Lagarde attends a hearing of the European Parliament’s Economic and Monetary Affairs Committee on November 28, 2022 in Brussels, Belgium.

Thierry Monasse | Getty Images News | Getty Images

The European Central Bank opted for a lower rate hike at its meeting on Thursday, raising its key rate from 1.5% to 2%.

It also said that from early March 2023, it would begin to reduce its balance sheet by 15 billion euros ($16 billion) per month on average until the end of the second quarter of 2023.

It said it would announce more details about its Asset Purchase Program (APP) holding cuts in February and would regularly reassess the pace of the cut to ensure it was in line with its monetary policy strategy.

The widely expected 50 basis point rate hike is the central bank’s fourth hike this year.

This increased by 75 basis points in October and September and by 50 basis points in July, pushing rates out of negative territory for the first time since 2014.

“The Governing Council considers that interest rates will still have to rise significantly at a sustained pace to reach levels that are sufficiently restrictive to ensure a rapid return of inflation towards the medium-term objective of 2%,” the Commission said. ECB in a press release.

“We have more ground to cover…we are in for a long game,” ECB President Christine Lagarde told a news conference.

The euro went from a 0.5% loss against the dollar to a 0.4% gain after the news, but European stocks in the Stoxx 600 index plunged 2.4%.

The central bank said it was working on an inflation forecast that had been “significantly revised upwards” and that inflation would remain above its 2% target until 2025.

It now expects average inflation of 8.4% in 2022, 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025.

However, he sees a “relatively short-lived and shallow” recession in the region.

It comes after the latest inflation data for the eurozone showed a slight slowdown price increase in novemberalthough the rate remains at 10% per annum.

Lagarde told CNBC’s Annette Weisbach at the press conference: “One of the key messages, in addition to the hike, is the indication that not only will we be raising interest rates further, which we said before, but today we judged that interest rates will still have to rise significantly, to a stable place.”

“It’s pretty obvious that based on the data we have at the moment, a meaningful rise at a steady pace means we should be raising interest rates at a 50 basis point pace for some time,” he said. she declared.

Regarding the quantitative tightening announcement, she said the ECB wanted to follow the principles of being predictable and measured.

The central bank’s decision to make an average of €15 billion in APP cuts over four months represents around half of repayments over that period, and was based on advice from its market team and all banks central and other officials involved in its decision-making, explained Lagarde.

“It seemed an appropriate number to normalize our balance sheet, keeping in mind that the key tool is the interest rate,” she said.

The US Federal Reserve on Wednesday increased its main rate by 0.5 percentage point, just like the bank of england and Swiss National Bank Thursday morning.

“Unlike the Bank of England, this is a hawkish hike, given the language on [quantitative tightening] and a definitive start date,” BMO Capital Markets analysts said.

However, they noted that the ECB was lagging behind other central banks in reducing its balance sheet and that reinvestments under its pandemic emergency purchase program would continue.

“The language used in the statement has operational overtones, and the Bank is leaving QT’s path open,” they wrote in a note.

Leave a Comment