The Governing Council of the European Central Bank (ECB) has decided to raise interest rates by 50 basis points, so that the interest rate for its refinancing operations will stand at 3%, while the deposit rate will reach 2.50% and the lending rate will be 3.25%.
It has also advanced that, in view of the pressures on underlying inflation, «it plans to increase interest rates by another 50 basis points at its next monetary policy meeting in March», raising the reference rate to 3.50%, in order to subsequently evaluate the future path of its monetary policy.
«The Governing Council will continue on the course of significant increases at a sustained pace in interest rates and keep them at sufficiently restrictive levels to ensure the timely return of inflation to its 2% medium-term objective,» the institution has assured in a statement.
In this sense, it has defended that keeping interest rates at restrictive levels will reduce inflation over time by moderating demand, and will also serve as protection against the risk of a persistent upward shift in inflation expectations.
In any case, he stressed that the Governing Council’s future decisions on policy rates will continue to be data-dependent and follow an approach in which decisions will be taken at each meeting.
With this fifth consecutive increase in the price of money, which has reached its highest level at the end of 2008, the ECB shows no signs of easing in the normalization of its monetary policy, after the increase of another 50 basis points in December and the two 75 basis point increases at the October and September meetings, following an initial increase of half a percentage point in July 2022.
The ECB’s decision comes a day after news that the eurozone’s year-on-year inflation rate moderated in January for the third consecutive month, easing to 8.5%, down seven-tenths of a percentage point from 9.2% in December and at its lowest level since May 2022, before the central bank began raising rates.
The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) also decided yesterday to raise interest rates by 25 basis points to a target range of 4.50% to 4.75%.
At the subsequent press conference, Fed Chairman Jerome Powell indicated that further rate hikes will be necessary to contain inflation, although he limited the US central bank’s roadmap to «a couple more hikes».
BALANCE SHEET REDUCTION.
On the other hand, the ECB’s Governing Council has confirmed that it will begin to reduce its debt portfolio acquired under the APP program in March by 15 billion euros per month on average, a pace it will maintain until the end of June 2023, determining later the necessary pace of reduction.
In this regard, it has specified that partial reinvestments will be carried out in line, broadly speaking, with current practice.
In particular, the remaining reinvestments will be allocated in proportion to the redemption quota of each of the programs comprising the APP and, in the case of the government securities purchase program (PSPP), to the redemption quota corresponding to each jurisdiction and to each national and supranational issuer.
For the Eurosystem’s corporate bond purchases, the remaining reinvestments «will be directed more sharply towards the issuers with the best weather performance».
Without prejudice to the ECB’s price stability objective, this approach will support the gradual decarbonization of the Eurosystem’s corporate bond holdings in line with the objectives of the Paris Agreement, the institution has noted.
As regards the PEPP, the emergency program launched during the pandemic, the Governing Council plans to reinvest the principal of maturing securities purchased under the program until at least the end of 2024.
In any case, the future wind-down of the PEPP portfolio will be managed in such a way as to avoid interference with the appropriate monetary policy stance.
As such, the Governing Council will continue to exercise flexibility in the reinvestment of the principal of maturing PEPP portfolio securities, with the objective of countering pandemic-related risks to the monetary policy transmission mechanism.
Source: (EUROPA PRESS)
