ECB

Monetary Policy Developments

March 2023

ECB raises interest rates by 50 basis points(as indicated six weeks ago) while pointing out that "inflation is projected to remain too high for too long." Investors were anticipating a smaller rate increase in light of last week's turmoil in U.S banking sector. ECB noted that the banking sector in Europe is strong , with sufficient capital and liquidity positions but stressed that it will be there to support it in any case. "In any case, the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy." ECB said in a statement.

May 4 2023

The Governing Council decided to raise the three key ECB interest rates by 25 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.75%, 4.00% and 3.25% respectively, with effect from 10 May 2023.

The APP portfolio is declining at a measured and predictable pace, as the Eurosystem does not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of June 2023.

Investors now see the terminal rate at around 3.65%, indicating that one more hike is fully priced in but that opinion is split on a second move.

Commentary

Frederik Ducrozet at Pictet Wealth Management

• "We continue to expect the ECB to hike rates by 25 bps in June, bringing the deposit rate to a peak of 3.50%, with risks of a final 25 bps hike in July depending on future developments in the U.S. banking system,"

June 15 2023

ECB hikes interest rate by 25 basis points, taking its main target to 3.5% as expected by the market. However, future rate decisions look uncertain.

“The Governing Council’s future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary,” the ECB said in a statement.

• ECB also revised its projections for headline inflation to 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. Initially, they forecasted headline inflation to average 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025.
• They also revised their projections for core inflation upward. They are now forecasting it to average 5.1% in 2023, 3.0% in 2024 and 2.3% in 2025. Initially, they projected it to average 4.6% in 2023, 2.5% in 2024 and 2.2% in 2025.
• They revised down GDP projections to 0.9% in 2023 and 1.5% in 2024. Initially they forecasted it to be 1% in 2023 and 1.6% in 2024.

July 27 2023

• ECB raises interest rate by 25 basis points taking its main rate to 3.75%.

  “Inflation continues to decline but is still expected to remain too high for too long,” the ECB said in a statement.

• The ECB kept options foe September meeting open.

  The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction," the statement added.

• The rate hike was widely expected by the market.

September 14 2023

• ECB hikes interest rates by 25 basis points while pointing out that “Inflation continues to decline but is still expected to remain too high for too long.”
• ECB said that the decision reflects an upward revision in macroeconomic projections, which sees inflation averaging 5.6% in 2023, 3.2% next year and 2.1% in 2025.
• ECB staff have lowered their economic growth projections significantly. They now expect the euro area economy to expand by 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025.
• The policymakers suggested that the interest rates are now at a level deemed as the peak and that future decisions will be informed by incoming data.

  “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target. The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction,” the statement said.

• The market was largely divided on the ECB’s next move but by Thursday morning the prabability of an hike had risen to 63% following a Reuters article which said the ECB expects euro zone inflation to remain above 3% in 2024.

October 26 2023

• ECB holds interest rates steady, as was expected by the market.
• The deposit rate will remain at 4%.
• ECB said the “incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook” for inflation to reach 2.0%.

“Inflation is still expected to stay too high for too long, and domestic price pressures remain strong. At the same time, inflation dropped markedly in September, including due to strong base effects, and most measures of underlying inflation have continued to ease. The Governing Council’s past interest rate increases continue to be transmitted forcefully into financing conditions. This is increasingly dampening demand and thereby helps push down inflation."