ECB raises eurozone interest rate by another 50 basis points

The European Central Bank (ECB) raised interest rates in the euro area by another 50 basis points. The decision was announced this Thursday after a meeting of the Board of Governors, and this is the fourth consecutive increase aimed at curbing inflation. However, this represents a relief to the pace of growth, as the latter figure was 75 basis points.

The interest rate applicable to the main refinancing operations is increased to 2.5%, while the interest rate applicable to the margin credit line is increased to 2.75% and the rate applicable to the standing deposit is increased to 2% from 21 December 2022.

Today the Governing Council decided [quinta-feira] The ECB will increase three key interest rates by 50 basis points and, based on a significant upward revision of the inflation forecast, expects to continue raising them,” said the central bank, led by Christine Lagarde.

In particular, the group believes that interest rates “still need to rise significantly at a sustained pace” to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.

Inflation in the euro area slowed to 10% in November, lower than the 10.6% annual fluctuation recorded in October, according to Eurostat’s operational estimate. However, core inflation, which excludes energy and unprocessed foods that are more volatile, continued to accelerate.

“Keeping interest rates capped will reduce inflation over time by curbing demand and also protect against the risk of a permanent rise in inflation expectations,” the ECB defends.

Reducing portfolio debt at a “measured and predictable” pace
Along with raising interest rates, the ECB also said it would start by cutting debt programs. After a decade of takeovers – so-called “quantitative easing” (QE) – to stimulate the economy, the ECB has already suspended net bond purchases, limiting itself to using the amounts of bonds that have reached maturity. And now and on this parameter will recede.

“From March 2023, the Asset Purchase Program portfolio (“Asset Purchase Program” – APP) will decline at a moderate and predictable rate as the Eurosystem will not reinvest all capital payments on maturing securities,” he explains.

Between December 2022 and November 2023, the bonds mature to 339 billion euros (of which 77% is public debt). The reduction will average 15 billion euros per month until the end of the second quarter of 2023. From there, “subsequent rates will be determined over time.”

This was the last meeting of the year and the next one is scheduled for February, when the decision makers will announce the details of the APP cuts. 🇧🇷The Board of Governors will regularly review the rate of contraction of the APP portfolio to ensure that it remains in line with the overall strategy and direction of monetary policy, to keep the market functioning and maintain tight control over short-term money market conditions. He says.

“At the end of 2023, the Board of Governors will also review the operating framework used to influence short-term interest rates, which will provide information on the completion of the balance sheet normalization process,” adds the Monetary Authority.