The European Central Bank has raised interest rates by 50bps in line with expectations. The central bankexpects to raise rates further keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target. Inflation remains a sticking point with the ECB confirming it intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy. Future decisions will be data dependent and follow a meeting-by-meeting approach.
Furthermore, the central bank confirmed the APP portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of June 2023 and its subsequent pace will be determined over time.
The ECB’s job is a tough one given the economic backdrop of the various countries in the Euro area. The Bank’s own December projections saw inflation remaining at 3.4% in 2024 and 2.3% in 2025, above its target rate of 2%. Energy prices have taken a dive since the ECB’s December meeting which could see the ECB lower their inflation expectations moving forward. The Russia-Ukraine conflict however remains an uncertainty as evidenced by the IMF’s warning that the conflict still poses a significant risk to global recovery.
Looking ahead to the upcoming ECB Meetings and the rest of the year inflation and particular the core inflation data is likely to be a driving force behind the ECB’s decisions. ECB policymakers have been hawkish heading into this meeting despite some positive signs with the ECBS Klaas Knot stating that he wants at least two more 50bps hikes (today’s meeting and the upcoming March meeting), which seems to be the plan given the policy statement.
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