The headquarters of the European Central Bank (ECB) in Frankfurt
by Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) – The European Central Bank (ECB) decided on Thursday to ease the pace of its interest rate hike but stressed that policy tightening would need to be prolonged and said it would trade in March at reduce the liquidity provided to the financial system, an additional weapon in its fight against inflation.
After being taken on the wrong foot by soaring prices, the ECB began in July to raise its rates at a rate unprecedented in its history. But, following in the footsteps of the US Federal Reserve and the Bank of England among others, it has chosen to limit their rise to half a percentage point this month, compared to three quarters of a point in September and October.
Its deposit rate, the one at which it remunerates bank deposits with it, which was still negative in the spring, is thus increased from 1.5% to 2%, as expected by the markets.
Like the Fed and the BoE, the ECB has clearly hinted that further hikes will be needed before inflation falls permanently. Its new economic forecasts indeed show that the rise in prices in the euro zone could remain above its target of 2% until 2025.
“We believe that interest rates will still have to rise significantly and at a steady pace,” its president, Christine Lagarde, told a press conference, adding that rate hikes of half a point were to be expected for “a considerable period of time”.
“We will stay the course, striking and retreating will not be enough,” she insisted.
The risks surrounding the outlook for inflation remain on the upside, she explained, citing the possibility of stronger than expected wage growth and that of seeing the budgetary measures to support purchasing power taken. by many countries boost demand.
The press release published after the meeting of the Board of Governors evokes the possibility of a “short and weak” recession and Christine Lagarde recalled that unemployment had returned to a historically low level.
A STRONGER TONE THAN EXPECTED, WHICH DRIVES THE EURO UP
The more offensive tone than expected of the Council communiqué and the press conference allowed the euro to rise above 1.07 dollar for the first time since June.
In the bond market, the yield on ten-year German government bonds exceeded 2.08%, up more than 15 basis points on the day, and European stocks widened their losses by mid-afternoon. , the Euro Stoxx 50 index yielding 3.37%.
“The ECB has raised rates by 50 basis points but rates will peak much higher given the indications given on the basis of a marked revision in inflation forecasts”, comments Samy Chaar, chief economist of the Lombard Odier bank. .
“Despite the deterioration in growth forecasts, the tightening implemented is not enough and more will have to be done, this seems to be the main message of the day.”
The next step in the tightening of the ECB’s monetary policy will be the reduction of the bond portfolio of some 5,000 billion euros built up in recent years over the purchases made by the ECB on the markets to ensure that interest rates are kept very low. .
From March, the portfolio of the APP purchase program should thus begin to shrink “at a measured and predictable pace”.
“This reduction will be 15 billion euros per month on average until the end of the second quarter of 2023, then its pace will be adjusted over time” from July, specifies the press release.
This process, which will amount to withdrawing liquidity from the financial system and which aims to promote a rise in long-term interest rates, has already been initiated by the Fed and the BoE. In particular, it will have consequences on the financing costs of banks in the euro zone, and therefore on the interest rates for loans granted to businesses and households.
(Report Balazs Koranyi, French version Marc Angrand, edited by Blandine Hénault)