On Thursday, December 15, a day after the Federal Reserve announced a 50 basis point interest rate hike, the European Central Bank (ECB) also announced a smaller increase, taking rates from 1.5% to 2%.
The ECB announces another rate hike
But the bank said it would continue with rate hikes”significant” in the future to control inflation and reduce its balance sheet. From March 2023, the ECB plans to reduce its balance sheet by an average of 15 billion euros ($15.9 billion) per month. This operation will then continue until the end of the second quarter of 2023.
In February, the ECB will reveal more details about the reduction of the asset purchase program (APP). In the meantime, it will continue to reassess its stance to stay on track with its monetary policy strategy. Earlier this year, in July, the ECB raised interest rates by 50 basis points.
Later, in September and October, it raised them by 75 basis points each, pushing rates out of negative territory for the first time in eight years. In a statement issued on Thursday, the ECB noted:
“The Governing Council believes that interest rates will still need to rise significantly at a steady pace to reach levels tight enough to ensure a timely return of inflation to the medium-term 2% target.”
The ECB is not turning around
Global financial markets are in turmoil and it is only a matter of time before the ECB decides to pivot. However, ECB President Christine Lagarde made her intentions clear, adding that the ECB would not be reversing anytime soon.
“Anyone who thinks this is a focal point for the ECB is wrong. We do not pivot, we do not hesitate, we show determination and resilience by continuing where we have done. … If you compare to the Fed, we have a long way to go. We have more time to go. We don’t slow down. We are here for the long haul“, she said.
The central bank has said it expects euro area inflation to remain above 2% through 2025. It estimates average inflation will fall to 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025 .
Market analysts believe that the Fed’s hawkish stance could lead to a major recession in the near future. But the ECB believes that it would be “relatively short and shallow“. Regarding the decision on quantitative easing, Lagarde said the ECB wanted to follow the principles of predictability and measurement.
The central bank looks set to shrink its balance sheet over the next year. Ms Lagarde said the move was the result of advice from her markets team, all central banks and other relevant officials. “We felt that this was an appropriate number to normalize our balance sheet, bearing in mind that the main tool is the interest rate“, she added.
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