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Frankfurt (Germany) (AFP) – The European Central Bank slowed the pace of its monetary tightening Thursday, but showed its determination to continue raising interest rates to curb soaring inflation.
“We still have a long way to go,” stressed bank director Christine Lagarde. “We have to go further… We are in a long way.”
Following in the footsteps of the US Federal Reserve on Wednesday and the Bank of England on Thursday, the European Central Bank decided to take a step back and chose to raise key interest rates by only half a percentage point.
This increase raises interest rates on bank liquidity not distributed in loans to 2 percent, and on short-term refinancing operations to 2.50 percent, which is the highest rate since the end of 2008.
After many years of low interest rates, the European Central Bank has been implementing a policy of increasing interest rates since the summer, with the aim of calming economic activity in the hope of curbing inflation.
The pace of rate hikes is the fastest since the creation of the European Central Bank in 1999, with two “significant” increases of 0.75 percent in September and October.
Reducing bond stocks
The ECB’s Governing Council said in a statement following its meeting that it “intends to continue increasing” interest rates in the coming months because “inflation remains very high and is expected to remain above target for a long time.”
In another sign that it is still struggling, the bank revealed that it has begun reducing its balance sheet, bloated by years of massive debt purchases to support the economy during periods of crisis.
Starting next March, the institution will reduce its stock of bonds, which currently stands at 3.3 trillion euros, “by not reinvesting all principal payments in securities payable”.
This cut will be 15 billion euros per month on average until the end of June, before being adjusted once more.
“It’s a somewhat aggressive decision,” said Janus Oliver Niklas, an expert at LBBW Bank.
He added, “The interest rate hike was expected. On the other hand, many were surprised by the possibility of continuing to raise it at the same pace.”
The “battle” continues
“We expect interest rates to be raised by 50 basis points for a period of time,” IMF Director Christine Lagarde told reporters Thursday.
“The ECB’s battle once morest inflation continues, as well as once morest any deterioration in its reputation and credibility,” commented analyst at ING Bank Carsten Brzeski.
Inflation eased slightly in November at 10 percent for the year, from 10.6 percent in the previous month, thanks to lower energy costs.
But the rise in prices is expected to remain well above the 2 percent target the central bank wants, according to updated forecasts published Thursday.
The foundation expects inflation to reach 6.3 percent next year before declining to 3.4 percent in 2024 and 2.3 percent in 2025, approaching the 2 percent target over time.
One of the Bank’s concerns is that it expects “wage growth at rates well above historical averages” as wage demands increase to compensate for the loss in purchasing power caused by rising prices.
Eurozone GDP is expected to contract in late 2022 and early next year due to the energy crisis and tighter financing conditions, but this recession will be “short and shallow,” according to the European Central Bank.
The institution’s expectation of growth in the next year decreased from 0.9 to 0.5 percent, expecting higher growth of 1.9 percent in 2024 and 1.8 percent in 2025.
Analysts at Berenberg Bank believe that the European Central Bank, which was accused a year ago of indolence in the face of rising prices, has made up its mind: it is ready to “accept some economic pain in the short term to bring inflation back to its target”.
© 2022 AFP
