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European Central Bank raises rates by 50 basis points, pledges further hike in March

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Christine Lagarde, president of the European Central Bank speaks at an event.

Bloomberg | Bloomberg | Getty Images

The European Central Bank on Thursday confirmed expectations of a 50 basis point interest rate increase, taking its key rate to 2.5%.

In a statement, it pledged to “stay the course in raising interest rates significantly at a steady pace” and, in unusually firm language, said it intended to hike by another 50 basis points in March.

It said keeping rates at restrictive levels would control price rises by dampening demand. Decisions at future meetings will be data-dependent, it added.

The move follows four hikes in 2022 which brought euro zone rates out of negative territory for the first time since 2014.

Euro zone inflation fell for the third straight month in January, flash figures published Wednesday showed, but headline inflation remained high at 8.5%. Core inflation, which excludes energy and food, was flat at 5.2%.

ECB president: Fiscal and monetary policy must work in conjunction with one another

“Price pressures remain strong, partly because high energy costs are spreading throughout the economy,” ECB President Christine Lagarde said in a press conference following the announcement.

Discussing the euro zone’s economic picture, she noted growth had slowed to 0.1% in the fourth quarter and was expected to remain weak in the near term, with continued geopolitical uncertainty and tighter financing conditions weighing on growth.

However, she continued: “The risks to the outlook for economic growth have become more balanced,” noting gas supplies were more secure, supply pressures were easing, consumer confidence was improving and rising wages and lower energy prices would boost consumption.

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“Overall, the economy has proved more resilient than expected and should improve over the coming quarters,” she said.

Lagarde also said governments should roll back support on energy prices to avoid driving up medium-term inflationary pressures.

Sylvain Broyer, chief EMEA economist at S&P Global Ratings, said it now seemed the ECB’s rate cycle would peak in the 3 to 3.5% range, but it was difficult to be precise from Thursday’s announcement.

“The reading of the European economy remains complex, as it is subject to opposing and asynchronous forces … It would be premature to assume that the ECB will cut rates at the end of this year,” Broyer said.

Quantitative tightening

In December, the ECB announced that from March it would begin to reduce its 5 trillion euro ($5.49 trillion) balance sheet by 15 billion euros per month on average until the end of June 2023.

The euro zone’s central bank pumped billions into the euro economy (via bond purchases) over the last decade to try to stimulate growth during different crises, such as the coronavirus pandemic. A reduction in its balance sheet, and the selling off of its bond portfolio, is seen as an extra way to tighten policy aside from rate hikes.

On Thursday, it said that — in line with current practice — it would continue partial reinvestments of its maturing debt. Reinvestments in the bond market are seen as stimulatory and can ease pressure on the borrowing costs for certain nations.

“The remaining reinvestment amounts will be allocated proportionally to the share of redemptions across each constituent programme of the APP (Asset Purchase Programme) and, under the public sector purchase programme (PSPP), to the share of redemptions of each jurisdiction and across national and supranational issuers,” its statement said.

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James Thomas
James Thomashttps://businessadvise.org
Hello, I am James Thomas blogger and content creator who specializes in personal finance and investing at Business Advise. I have been writing for over 5 years and have built a large following of readers who value practical advice and actionable tips. I'm committed to helping people take control of their financial futures and achieve their goals.

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