The European Central Bank (ECB) announced an interest rate hike of 0.75 points on the 27th. Central bank deposit rates have doubled to their highest level in more than a decade. It prioritized containing record inflation even as a recession became more likely.
The 0.75 point rate hike for the second consecutive meeting was what economists expected. The central bank deposit rate, which was negative before the July rate hike, was raised to 1.5%. Officials commented that the withdrawal of monetary easing had made “substantial progress”.
“Inflation remains too high and should remain above target for a long period of time,” the ECB said in a statement. The board said it expects further interest rate hikes. He said rate hikes will continue “beyond”, instead of using the phrase “for several meetings”.
By continuing to drastically raise interest rates even as the energy market turmoil hurts the eurozone economy, the ECB reiterated its determination to keep inflation in check.
“Eurozone economic activity is likely to have slowed significantly in the third quarter,” Lagarde said in a press conference.
When asked about the change in the wording of the rate outlook, he said the exact path would be decided at each meeting, but said it was entirely possible that a rate hike would occur “in a few other meetings”. Interest rate normalization is not yet complete, he said, adding that “there is still work to be done.”
Short-term money market expectations for rate hikes have fallen by up to 20 basis points. He revised his forecast that central bank deposit rates will peak at just under 2.75% next year. Last week it was supposed to be above 3.25%. The euro has widened its decline.
The ECB also tightened terms on more than € 2 trillion ($ 2.8 trillion) outstanding in long-term conditional refinancing (TLTRO) operations it offered low-cost banks during the coronavirus crisis. Recent rapid rate hikes have made it difficult for banks to make risk-free profits simply by keeping funds borrowed under the program in the ECB’s accounts.
Lagarde said the TLTRO was designed at a time when possible deflation was feared, but now it risks undermining the effectiveness of rate hikes to deal with “extraordinary” inflation.
TLTRO balances plague the ECB: bank free-riding more fuel for inflation
Lagarde also said that the risks to the growth outlook are “clearly” to the downside, citing higher financing costs and lower confidence between consumers and businesses. On inflation, he said the opposite and said the risks were to the upside.
Ultimately, the ECB will have to reduce the € 5 trillion bond portfolio it bought in response to previous crises. Discussions on the process, known as quantitative tightening (QT), have begun informally, but concrete action is expected next year.
Lagarde said QT was not discussed at this meeting, but said it would be on the agenda for the December meeting. The decision was made to “discuss this in December and determine the key principles for reducing the Bond Purchase Program (APP) portfolio,” she said.
However, the ECB does not currently plan to announce a date for the start of the QT in December, according to officials familiar with the discussions. An ECB spokesperson declined to comment on the plan.
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