The European Central Bank (ECB) announced on Thursday (2nd) that it would raise interest rates by two yards (50 basis points) as scheduled, in line with market expectations. The European Central Bank said that in view of potential inflationary pressures, interest rates still have to be raised significantly, and intends to raise interest rates by 2 yards again in the monetary policy in March, and then evaluate the follow-up path of its monetary policy.
The hike brings the marginal lending rate to 3.25%, the main refinancing rate to 3% and the deposit facility rate to 2.5%. The European Central Bank has raised interest rates by 300 basis points since July last year, and the main refinancing rate reached a new high since November 2008.
European Central Bank President Lagarde hinted at a press conference in December last year that there would be three interest rate hikes. At that time, it was estimated that the interest rate would be raised by 2 yards in February next year, and then there would be two more interest rate hikes of 2 yards each. The adjustment of the statement made the market hawkish expectations fall back.
In recent weeks, internal divisions among ECB officials have intensified, with different opinions on whether to continue to raise interest rates by 2 yards or slow down the pace of interest rate hikes. Now it appears that the ECB has put the debate to rest. As for inflation, the European Central Bank stated that it will keep interest rates at a restrictive level, reduce inflation by curbing demand, and at the same time prevent the risk of continued rise in inflation expectations.
The asset purchase program (APP) will be reduced to an average of 15 billion per month in the second quarterEUR
In addition to its commitment to interest rates, the ECB will also discuss how to reduce its 5 trillionEURProvided more details on the APP’s bond portfolio, reiterating that the APP portfolio will start to decline from March, with a monthly cap of 15 billion on maturing debt from March to JuneEUR。
The pace of reducing the asset purchase program after the second quarter will be determined over time, and the asset purchase program portfolio will decline at a predictable rate. At the same time, the European Central Bank stated that the Governing Council stands ready to adjust all tools and will continue to maintain flexibility in the reinvestment of the Emergency Pandemic Asset Purchase Program (PEPP) if necessary. The reinvestment of PEPP proceeds will continue until at least the end of 2024.
In addition, the ECB noted that the remaining reinvestment amount will be allocated proportionally to the redemption share of the various component programs of the asset purchase program and allocated to each jurisdiction under the Public Sector Bond Purchase Program (PSPP).Without compromising the ECB’s price stability objective, such an approach would supportEURThe region’s corporate bond holdings will gradually decarbonise, in line with the Paris Agreement goals.
Lagarde: 2 more rate hikes likely in March
Lagarde said at a press conference after the monetary policy meeting that risks to the outlook for economic growth and inflation have become more balanced and the economy is more resilient than previously expected.
Although Lagarde admitted that the basis point for the ECB to raise interest rates by 2 yards in March is not “irreversible”, she believes that such a rate hike is very likely and said that unless there are very extreme circumstances, it will not stop raising interest rates by 2 yards.
Lagarde added: “There is no doubt about our determination to achieve 2% inflation in the medium term. Once we enter the restrictive zone, there is no doubt that we want to stay there well.”
Lagarde believes that the decline in inflation is mainly due to falling energy costs. Energy prices this year are below the ECB’s forecast in December. But price pressures remain strong.
