Considering that the normalisation of its monetary policy has not been achieved when inflation is estimated at 8.5% in the euro area in January, the ECB decided on Thursday 2 February in Frankfurt to raise its three key rates by 0.5%. It announced its intention to do the same at its meeting on Thursday 16 March.
As of 8 February, the interest rates on the main refinancing operations, the marginal lending facility and the deposit facility will be raised to 3.00%, 3.25% and 2.50% respectively.
“The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target”, ECB President Christine Lagarde said, assuring that the monetary institute is “determined” to respect its primary mission.
She said that the ECB’s actions will demonstrate “continuity” and “consistency”. After the increase decided on Thursday, the ECB therefore “expects” to raise rates by another 50 basis points in March. However, according to Ms Lagarde, the current figures on the fact that the surge in energy prices is spreading to the whole economy (with core inflation at 5.2% in January), the fiscal measures that euro area countries have adopted to help the most affected households and companies and the negotiations on wage increases make it possible to anticipate this intention, which is certainly “not a 100% commitment” and will have to be confirmed by updated data.
Ms Lagarde did not say whether rates will peak in March, saying only that once rates have reached “sufficiently restrictive levels” they will be held at those levels for as long as necessary.
On Thursday, the ECB President also sent a clear message to the euro area countries. Prepared the day before at a dinner with Eurogroup President Paschal Donohoe, the message states that targeted and temporary schemes put in place by Member States to help economic operators affected by the energy crisis should be withdrawn “quickly” in line with the fall in energy prices on retail markets and “in a concerted manner” among the 20 euro area countries.
“Measures that do not respect these principles are likely to exacerbate inflationary pressures in the medium term, which would require a stronger monetary policy response”, Ms Lagarde warned.
APP. In addition, the ECB has clarified its policy on reducing the size of its balance sheet. Among other things, it confirmed that the asset purchase programme (APP) portfolio will be reduced by €15 billion per month on average between March and June (see EUROPE 13085/9).
As for the remaining reinvestments in corporate bonds, they will be “more strongly tilted towards issuers with a better climate performance”, in line with our approach to support the gradual decarbonisation of these securities held by the ECB and national central banks, stressed Mrs Lagarde (see EUROPE 12986/20). Asked whether the ECB might be involved in ‘greenwashing’, she assured that the monetary institute was acting to guard against such a risk.
See the details of the ECB’s balance sheet reduction: https://aeur.eu/f/574
Finally, the ECB President painted a picture of a macroeconomic situation that remains uncertain, but where risks have become “more balanced”. In particular, she noted that with the abandonment of the ‘zero Covid-19’ policy, China’s reopening will have a positive impact on the global economy while potentially increasing inflationary pressure. With an average rate of 0.1% in the fourth quarter, growth in the euro area has slowed considerably since mid-2022, but less than expected, and is likely to remain weak in the short term.
The Governor of the Croatian National Bank, Boris Vujčić, officially participated as a full member of the ECB’s Governing Council for the first time, following his country’s accession to the euro area on 1 January this year. (Original version in French by Mathieu Bion)