“Inflation will remain too high for too long. The Governing Council therefore decided today to increase the ECB’s three key interest rates by 50 basis points, in line with its determination to ensure a timely return of inflation to the medium-term objective of 2%. The high level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s key interest rate decisions, which will be determined by its assessment of the inflation outlook in the light of incoming economic and financial data, underlying inflation dynamics and the transmission strength of monetary policy.”
In his Press conference After the ECB meeting, the president of the body, Christine Lagarde, has reiterated emphatically the message already published in the statement: the hawkish approach is maintained with the aim of tackling the increase in inflation.
And that the market was not clear. Since the bankruptcy of SVB Financial Group (NASDAQ:SIVB) and the contagion effect on Credit Suisse (SIX:CSGN), some experts expected that the ECB could cool its rate hike.
Something that has not been the case. The ECB raises the ECB’s three key interest rates by 50 basis points. Consequently, the Interest rate of the main refinancing operations and interest rates of the Marginal credit facility and the Ease of deposit They will increase to 3.50%, 3.75% and 3.00% respectively, with effect from March 22, 2023.
However, the ECB is closely monitoring the current financial situation. And the agency wanted to make it clear. “The Governing Council is closely monitoring current market tensions and stands ready to respond as necessary to preserve price stability and financial stability in the Eurozone. The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, 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,” Lagarde reiterated.
Thus, the ECB now forecasts average inflation of 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. At the same time, underlying price pressures remain strong. Inflation, excluding energy and food, continued to rise in February and ECB experts expect it to average 4.6% in 2023, higher than forecast in the December projections. Subsequently, it is expected to fall to 2.5% in 2024 and 2.2% in 2025, as the upward pressures of previous supply crises and the reopening of the economy disappear and a tighter monetary policy increasingly curbs demand, reads the agency’s statement.
Economic forecasts
As explained by the President of the ECB, “the new macroeconomic projections of the ECB experts were finalized at the beginning of March before the recent emergence of tensions in the financial markets. As such, these tensions imply additional uncertainty around baseline assessments of inflation and growth. Prior to these latest developments, the baseline path for headline inflation had already been revised downwards, mainly due to a lower-than-previously expected contribution from energy prices.”
Baseline projections for growth in 2023 have been revised upwards to an average of 1.0% as a result of both falling energy prices and the economy’s greater resilience to the challenging international environment. ECB staff then expect growth to pick up further, to 1.6%, in both 2024 and 2025, supported by a strong labour market, improved confidence and a recovery in real incomes. At the same time, the pick-up in growth in 2024 and 2025 is weaker than expected in December, due to tightening monetary policy.
Asset Purchase Program (PPP) and Pandemic Emergency Purchase Program (PEPP)
As the ECB statement indicates, the PPP portfolio is declining at a measured and predictable pace, as the Eurosystem does not reinvest all principal payments on maturing securities. The decline will amount to €15 billion per month on average until the end of June 000 and its subsequent pace will be determined over time.
As regards the PEPP, the Governing Council intends to reinvest principal payments of securities purchased under the programme that are due until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
The agency will continue to relax the reinvestment of overdue repayments in the PEPP portfolio, in order to offset the risks of the monetary policy transmission mechanism related to the pandemic.
As banks are repaying amounts borrowed under targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations are contributing to the stance of their monetary policy.
“The ECB stands ready to adjust all its instruments within its mandate to ensure that inflation returns to its 2% medium-term target and to preserve the smooth functioning of the transmission of monetary policy. The ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed. In addition, the Transmission Protection Instrument is available to counter disorderly and unjustified market dynamics that pose a serious threat to the transmission of monetary policy in all euro area countries, enabling the Governing Council to more effectively fulfil its price stability mandate.” Lagarde has confirmed.
