• The ECB raises rates by 50 bps, showing similar increases
  • QT starts in March
  • The Eurozone recession is fading.
  • Inflation concerns are skewed to the upside.

FRANKFURT, December 15, 2011 (FBC) The European Central Bank on Thursday eased the pace of interest rates, but said it would remain under strict control and announced plans to withdraw money from the financial system.

After getting off on the wrong foot with a surprise rate hike, the ECB is raising rates at an unprecedented rate. Inflation has been rising since the economy reopened after the Covid-19 pandemic, fueled by supply bottlenecks and rising energy costs following Russia’s invasion of Ukraine.

This week, in a move that eclipsed similar measures by the Federal Reserve and the Bank of England, it raised the rate it pays on bank deposits by 50 basis points to 2 percent, a departure from a decade of ultra-easy policy.

The expected decision marks a slowdown from the 75-basis-point hikes at each of the ECB’s two previous meetings, as inflation is showing some signs of peaking and the economy is slowing.

But to make up for that slowdown, ECB President Christine Lagarde has vowed to raise rates again up to three times, sources told Reuters.

“Based on the information we got today, it indicates another 50 basis point hike in the next meeting and maybe the one after that and maybe another 50 basis points after that,” Lagarde said in a press conference following the rate announcement.

Money markets moved higher with higher deposit rates above 3% in July, compared with 2.75% before the meeting.

To convince the ECB of its commitment to fight high prices, the Fed and the BOE are making great efforts to raise prices.

But this return to give some guidance on rates clashed with the emphasis that the bank takes a decision based on “meeting-by-meeting” and data because it was a mystery to some ECB-watchers.

“There is an internal contradiction here that no words can resolve,” said Francesco Papadia, a former senior ECB official who is now a fellow at Bruegel’s think tank.

Underscoring Lagarde’s pledge for more hikes, the ECB’s new forecasts on Thursday showed inflation above the ECB’s 2% target until 2025.

And Lagarde pointed out that inflation could still come in higher than expected, adding to the possibility of higher-than-expected wage increases and increased demand for government stimulus measures in the 19 eurozone countries.

But those forecasts were less “controversial” than former ECB vice-president Vitor Constancio, who doubted inflation could stay as high as 3.4% in 2024.

“The problem is that these December forecasts have many non-model ‘judgments’ ordered by national central banks (Bundesbank etc.),” ​​the Portuguese economist said on Twitter.

The ECB also said that any recession is now expected to be “relatively short-lived and shallow” and Lagarde said the euro’s unemployment levels are at “rock-bottom”.

Reuters Graphics Reuters Graphics

QT is coming.

The ECB also announced plans to stop replacing growth bonds by switching asset purchases from its 5 trillion euro ($5.31 trillion) portfolio, which has made the central bank the biggest lender to many euro zone governments.

Under the plan, it will reduce monthly reinvestment from the asset purchase program by 15 billion euros starting in March and revise the rate of balance sheet reduction from July.

The move to tighten liquidity in the financial system is designed to increase long-term borrowing costs and is similar to the Fed’s move earlier this year.

The impact was immediately felt by the eurozone’s weakest borrowers, such as the Italian government, which relies on the ECB as its main regulator.

The yield on Italy’s 10-year bonds rose 31 basis points to 4.19%, the biggest one-day change since the pandemic hit markets in March 2020.

“The shrinking of the ECB’s balance sheet, coupled with higher spending needs due to the ongoing energy crisis, could renew pressure on euro area sovereign bonds,” said Daniel Antonucci, chief economist at Quinnet Private Bank.

The ECB said it would update the market on the “endpoint of balance sheet normalization” at the end of 2023, indicating how much it plans to reduce the amount of money in the banking sector.

This is key to determining the cost of funding for banks and therefore interest rates for companies and households.

Reuters graphics

($1 = 0.9413 EUR)

Additional reporting by Yoruk Bachley; Writing by Mark John; Edited by Catherine Evans and Susan Fenton

Our Standards: The Thomson Reuters Trust Principles.

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