ECB Delivers 50 Bps Hike, Signals Repeat In March

The European Central Bank raised its key interest rates by 50 basis points on Thursday, in line with expectations, and signaled that policymakers plan to repeat the move in March, when they will evaluate the future path of policy rates.

The Governing Council, led by ECB President Christine Lagarde, had slowed the pace of interest rate hikes to 50 basis points from 75 basis points in December.

Following the latest hike, the main refinancing rate, or refi, is at 3.00 percent, the deposit facility rate is at 2.50 percent and the lending rate is now 3.25 percent.

“The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2 percent medium-term target,” the central bank for the 20-nation currency bloc said at the opening of its policy statement.

Confirming existing market expectations, the bank said policymakers intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy.

Eurozone inflation slowed to an eight-month low of 8.5 percent in January, data from Eurostat showed on Wednesday. However, core inflation, which excludes prices of energy, food, alcohol and tobacco, was steady at 5.2 percent.

ING economist Carsten Brzeski said the celebrated fiscal stimulus, which has eased recession fears, is an additional concern for the ECB as it could transform a supply-side inflation issue into demand-side inflation.

Meanwhile, the increasing probability that a recession will be avoided in the first half of the year also gives companies more pricing power, showing that selling price expectations remain elevated, the economist said.

ING expects the ECB to not only continue hiking into late spring, but also to keep interest rates high for longer than markets have currently penciled in.

Read more: Eurozone Economy Avoids Contraction In Q4

“Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations,” the ECB said.

This implies that policymakers expect to leave the deposit rate at its peak/plateau for a long period, Capital Economics economist Andrew Kenningham said.

The research firm expects the ECB to raise the deposit rate from 2.5 percent to 3.0 percent in March, and to a peak of 3.5 percent by June, and hold it there until well into 2024.

The ECB also said the Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the monetary policy transmission across all euro area countries.

Read more: Eurozone Investment Outlook Bleak

Slowing credit growth in the euro area private sector, as revealed by the latest data from the ECB, and tightening credit standards and weakening loan demand, as revealed by the bank’s lending survey, suggest the monetary transmission is already taking place. However, economists observed that it may not be at a pace that the ECB desires.

Further, the ECB said on Thursday that policymakers decided on the terms for reducing the Eurosystem’s holdings of securities under the asset purchase program, or APP.

The APP portfolio is set to fall by EUR 15 billion per month on average from the beginning of March until the end of June 2023, as announced in December. The subsequent pace of portfolio reduction will be determined over time, the bank said.

The bank also said that the remaining reinvestments of its corporate bond purchases will be tilted more strongly towards issuers with a better climate performance.

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