In a sign of further normalisation of its monetary policy, the European Central Bank unveiled, on Thursday 15 December, how it intends to reduce, “at a measured and predictable pace”, its stock of securities accumulated under the asset purchase programme (APP).
From the beginning of March 2023, assets acquired under the APP and maturing securities will not be fully reinvested. “This decrease will amount to 15 billion euros per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time”, said ECB President Christine Lagarde. She noted that the amount of 15 billion euros is “ roughly half” of the payments of maturing securities over that period.
In February, the Governing Council will specify the parameters for reducing the APP holdings and regularly reassess the pace of its reduction to ensure it remains consistent with the overall monetary policy strategy and stance. By the end of 2023, it will also review its operational framework for steering short-term interest rates, which will provide information regarding the endpoint of the balance sheet normalisation process.
On the other hand, the ECB has decided not to touch, “at least until the end of 2024”, the stock of securities acquired under the ‘PEPP’ programme of massive repurchases of securities initiated to tackle the economic crisis caused by the Covid-19 pandemic (see EUROPE 12908/23). It states that the reinvestment of maturing PEPP securities will continue to be flexible.
Further increase in key interest rates by 0.5%
Unsurprisingly, the Governing Council also decided, by a large majority, to raise its main policy rates again, this time by 0.5%, following two increases of 0.75% in September (see EUROPE 13052/1) and October (see EUROPE 13017/13) and a 0.5% increase in July (see EUROPE 12998/13).
Therefore, as of 21 December, the ECB interest rates will be as follows: 2.50% for the main refinancing operations, 2.75% for the marginal lending facility and 2.00% for the deposit facility.
Ms Lagarde warned that rates will continue to rise “significantly and at a steady pace”. In her view, a steady increase of 0.5% seems appropriate, as “we have made progress, but we still have longer to go”. After that, “we will stay the course” to ensure a rapid return of inflation to the medium-term objective of 2%, she added. Any decision on rates will be taken on the basis of updated data and meeting after meeting.
On Thursday, the ECB published new inflation forecasts. After a slight decrease in November (10.0%) compared to October (10.6%), it is “at a level that is far too high” and will remain so “for far too long”, said Mrs Lagarde. In particular, food prices have risen further and the transfer of energy prices to retail consumers has not fully materialised.
The ECB thus forecasts the following path for inflation: 8.4% in 2022, 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025. Excluding energy and food prices, this trajectory would be as follows: 3.9% in 2022, 4.2% in 2023, 2.8% in 2024 and 2.4% in 2025.
As far as the economic situation is concerned, bearish risks prevail. Ms Lagarde did not rule out a “shallow” contraction in the fourth quarter of this year and the first quarter of 2023, due to the energy crisis, sluggish global economic activity and tighter financing conditions.
Growth will remain “subdued” next year, the former IMF director noted, unveiling the economy growth forecast at: 3.4% in 2022, 0.5% in 2023, 1.9% in 2024 and 1.8% in 2025.
See the ECB monetary policy decisions: https://aeur.eu/f/4p1 (Original version in French by Mathieu Bion)