The ECB’s Governing Council decided on Thursday 27 October to increase the monetary institute’s three key rates by 75 basis points. After this third consecutive rate hike, it believes that it has “made substantial progress in withdrawing monetary policy accommodation” while warning that “there is still ground to cover” before reaching the interest rate that would allow the monetary institute to comply with its mission of guaranteeing price stability at a level of 2% over the medium term.
Therefore, as of 2 November, the ECB interest rates will be as follows: 2.00% for the main refinancing operations, 2.25% for the marginal lending facility and -1.50% for the deposit facility.
Reporting on the decisions taken, ECB President Christine Lagarde did not rule out the possibility of several rate increases in the future, but declined to say how many more would be needed and whether they would be smaller than the one decided on Thursday.
“The destination is clear” and the exact path will be determined “meeting by meeting” and based on up-to-date data, she said, underlining the obsolete nature of forward guidance on the future direction of monetary policy.
However, she admitted that at some point the Governing Council will have to identify the policy rate that will allow the ECB to meet the 2% medium-term inflation target. Factors that will be taken into account include: the evolution of inflation and the economic outlook, the measures already taken since July and the time lag between monetary policy decisions and their effects on the economy.
This third increase in key rates - after those in September (see EUROPE 13017/13) and July (see EUROPE 12998/13) - has been justified by record-breaking inflation in the euro area, reaching 9.9% in September.
Of course, the price increase is mainly driven by the surge in energy prices caused by the Russian military aggression in Ukraine and by food prices. But “price pressures are evident in more and more sectors” Ms Lagarde noted, pointing to predominant upside risks. “The Governing Council’s monetary policy is aimed at reducing support for demand and guarding against the risk of a persistent upward shift in inflation expectations”, she said.
The former head of the IMF painted a picture of sluggish economic activity in the euro area, which “is expected to have slowed considerably in the third quarter” and to show “further weakening” in late 2022 to early 2023. This is due to the uncertainty linked to the war in Ukraine, disruptions in energy supply, persistent inflationary pressures, the rise in financing conditions and the deteriorating confidence of economic operators.
Nevertheless, Ms Lagarde said that the adverse scenario of a 0.9% GDP recession, envisaged in September by the ECB services, had not yet materialised, notably because Russia continues to supply gas to Europe and the prices of certain raw materials has fallen.
See the ECB monetary policy decisions: https://aeur.eu/f/3tm
TLTRO III. On Thursday, the ECB decided to modify the conditions for the third series of targeted longer-term refinancing operations (‘TLTRO III’). As of 23 November, the applicable interest rates will be recalibrated in order to adjust them to monetary policy normalisation.
In this way, we will reduce the size of our balance sheet, Ms Lagarde said, without denying the negative impact of such a measure on bank loans to economic operators. She said that at its meeting on 15 December the Governing Council will set out the “key principles” for a reduction in the monetary institute’s balance sheet, which she also referred to as a reduction in the portfolio of securities held through the ‘APP’ operation.
Finally, the ECB decided to set the remuneration of the required reserves at the rate of its deposit facility in order to align itself with market financing conditions.
More information on the ‘TLTRO III’ operation: https://aeur.eu/f/3tn (Original version in French by Mathieu Bion)