Believing that inflation is likely to remain “too high for too long”, the ECB Governing Council decided on Thursday 16 March to honour its commitment made in February (see EUROPE 13113/4) by raising the ECB’s three key interest rates by a further 50 basis points.
As of Wednesday 22 March, the interest rates on the main refinancing operations, the marginal lending facility and the deposit facility will therefore be raised to 3.50%, 3.75% and 3.00% respectively.
In presenting the decision, made by a “very large majority” of governors, the ECB President reaffirmed the monetary institute’s unwavering “determination” to respect its primary mission of ensuring inflation returns to its 2% objective in the medium term. She avoided questions from the press about the path of future rate hikes, repeatedly stressing the importance, in the face of current uncertainty, of making monetary policy decisions based on regularly updated data, including financial market developments.
The decisions taken on Thursday are based on data compiled up to 1 March and do not take into account the recent financial turmoil in the markets following the bankruptcy of three US banks (see EUROPE 13142/10) and Credit Suisse’s continuing troubles.
Ms Lagarde said that future policy decisions will be taken on the basis of the ECB’s assessment of the inflation outlook, “in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission”. This is a “totally new” consideration, she argued. She added that the ECB will continue to normalise its monetary policy if – and this is “a big caveat” – its baseline economic scenario of a continued gradual decline in inflation and higher economic growth in 2023 after the winter slowdown is maintained.
On Thursday, the ECB announced a new medium-term inflation forecast, now based on the following path: 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. With energy prices falling, the focus is on core inflation (excluding food and energy), which accelerated in February and is expected, according to Ms Lagarde, to “average 4.6% in 2023, which is higher than foreseen in the December projections”, before falling to “2.5% in 2024 and 2.2% in 2025”.
Regarding the economic situation, the monetary institute has revised upwards its growth forecast for 2023 to 1% of the euro area’s GDP, driven by robust employment and a catching up of purchasing power. It expects wealth production to reach 1.6% of GDP in 2024 and 2025, a downward revision, due in particular to the transmission of monetary policy, which increases the financing conditions of economic operators.
Financial turmoil. The ECB is monitoring the current market tensions “closely” and “stands ready to take the necessary measures to preserve price and financial stability in the euro area”, said Ms Lagarde, assuring that “no trade-off” will be made between price and financial stability, both of which are covered by specific monetary tools.
According to the former IMF chief, “the euro area banking sector is resilient, with strong capital and liquidity positions” that ensure it is in a stronger position than during the 2008 financial crisis.
“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”, she added. But “that is not what we’re seeing at the moment”, she insisted.
ECB Vice-President Luis de Guindos agreed, pointing to the robust liquidity levels of European banks, well above regulatory minimums and composed, he said, of high-quality assets. In his view, the Frankfurt monetary institute’s interest rate hike will increase the profitability of banks. He also noted the relative uniqueness of the US Silicon Valley Bank’s business model, with “a mismatch between assets and liabilities” that made it vulnerable. As for the exposure in terms of Credit Suisse, it is likely to be limited and very diffuse within the European banking sector.
See the monetary policy decisions: https://aeur.eu/f/5ul (Original version in French by Mathieu Bion)