ECB Vows Significantly Higher Rates After Half-Point Hike
After successive increases of 75 basis points, the ECB lifted the deposit rate by a half-point to 2% on Thursday, matching economists’ expectations.
(Bloomberg) -- The European Central Bank increased interest rates at a slower pace but said they must still rise “significantly” as it widened efforts to subdue inflation with a decision to shrink its €5 trillion ($5.3 trillion) bond portfolio.
After successive hikes of 75 basis points, the ECB lifted the deposit rate by a half-point to 2% on Thursday, matching economists’ expectations. Officials pledged a “steady” stream of further moves.
“We should expect to raise interest rates at a 50 basis-point pace for a period of time,” President Christine Lagarde told a news conference. “We have more ground to cover, we have longer to go and we are in for a long game.”
Traders added to rate-hike bets, pricing a deposit-rate peak of 3% next year, compared with 2.93% earlier. But Lagarde said financial markets hadn’t adequately accounted for the amount borrowing costs would need to rise to quell inflation.
Complementing the rate push, officials outlined plans for quantitative tightening — offloading government debt purchased as stimulus in the past. The plan envisages partially halting reinvestments of maturing bonds under the Asset Purchase Program from March. Volumes will average €15 billion a month in the second quarter, with the pace beyond that yet to be determined.
The ECB’s downshift on rate hiking, along with similar moves this week by the Federal Reserve and the Bank of England, may reflect belief that the worst inflation in a generation — while not vanquished — is at least near its peak.
The announcement follows a first dip in 1 1/2 years for runaway euro-zone price gains and comes with the currency bloc probably already in recession.
But, like the Fed, the message was that monetary tightening has some way to run yet — despite policymakers in Frankfurt already overseeing the most forceful spell of rate hikes in ECB history.
Fresh projections, also released Thursday, will help determine how they proceed from here. With Russia’s war in Ukraine still raging, the predictions confirmed a challenging backdrop that includes economic expansion of just 0.5% in 2023. Forecasts for inflation, meanwhile, were raised for the next two years. It’s still seen above the 2% target in 2025.
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A 2% deposit rate is in the vicinity of the theoretical neutral level that neither constrains nor stimulates the economy. But several officials have advocated further moves into restrictive territory as lofty energy prices continue to stoke inflation.
How high borrowing costs will ultimately be pushed is a central question now for investors, though it’s a topic on which policymakers are tight-lipped. Economists polled by Bloomberg before the decision foresaw only one more increase, in February, to 2.5%.
The planned reduction in bond holdings adds a new element to rate bargaining among the Governing Council’s soon-to-be-26 members and may have helped garner support for a smaller hike from the panel’s more hawkish officials.
Several had pushed for an early start to QT, while their more dovish colleagues have fretted over the deteriorating economic picture and voiced a preference for less aggressive action on rates.
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(Updates with Lagarde comments in third paragraph.)
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