On the 15th the European Central Bank (ECB) announced an increase in interest rates of 0.5 points. Lagarde warned investors that similar rate hikes will continue for some time as the worst inflation since the euro’s inception eases.
After two consecutive rate hikes of 0.75 percentage points, the central bank deposit rate is now at 2%. The rate hike was in line with economists’ expectations. The ECB has said it will raise interest rates even more “significantly”. It also announced that it will begin reducing its portfolio of bonds worth about 5 trillion euros (about 730 trillion yen) next March.
“It would be a mistake to think this is a change in ECB policy,” Lagarde said at a news conference. “We still have to go on. This is a long match,” she said.
President Lagarde at a press conference
Source: Bloomberg
Money markets had priced in higher expectations for an ECB rate hike and assumed that central bank deposit rates would peak at 3% next year. Before the announcement, it was 2.93%.
Lagarde said financial markets have not adequately priced the rate hikes needed to curb inflation.
The ECB also outlined plans to reduce its holdings of bonds it has bought in the past to stimulate the economy. Initiate quantitative tightening (QT) as a policy measure to support rate hikes. It plans to reduce its holdings of bonds purchased under the Asset Purchase Program (APP) by an average of €15 billion a month in the second quarter, according to the announcement. I still haven’t decided the pace after that.
Central banks across the region tightened aggressively
Source: Bloomberg The ECB has raised rates by 250 basis points this year
The slowdown in rate hikes by the ECB, followed by the Federal Reserve and the Bank of England, could reflect the idea that inflation is at least close to peak. Eurozone inflation fell for the first time in a year and a half in November. And the eurozone economy is probably already in a recession.
The ECB, which has already raised interest rates at its fastest rate since its inception, is clear it will continue to tighten, he said.
December economic forecast Source: European Central Bank The ECB has significantly revised its inflation projections upwards
The latest ECB economic forecasts, released today, confirmed that conditions remain grim. It expects growth of just 0.5% in 2023. Meanwhile, inflation expectations for the next two years have been raised and are expected to remain above 2% in 2025.
The main question for investors now is how high the ECB’s rates will be. Political committee members are tight-lipped about this. Economists interviewed by Bloomberg before the policy announcement showed expectations for just one rate hike in February, to 2.5% “Perhaps even in March, the Fed will suggest a half percentage point hike.”
Original title:ECB climbs half a point as Lagarde warns of other similar moves (4)(extract)
(Added comments from Governor Lagarde)
