The President of the European Central Bank, Christine Lagarde, addressed the Economic and Monetary Affairs Committee of the European Parliament in 2011. Attended a hearing on November 28, 2022 in Brussels, Belgium.
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The European Central Bank opted for a small rate hike at Thursday’s meeting, taking the key rate from 1.5% to 2%.
It said it would start reducing the balance by an average of 15 billion euros ($16 billion) a month from early March 2023 until the end of the second quarter of 2023.
In February, it said it would announce more details about the reduction in asset purchase program (APP) holdings and would regularly review the pace of the decline to ensure it was consistent with its monetary policy strategy.
The widely expected 50 basis point hike is the central bank’s fourth hike this year.
It hiked by 75 basis points in October and September and by 50 basis points in July, bringing rates out of negative territory for the first time since 2014.
The euro rose to 0.4% against the dollar following the announcement, from a 0.5% loss, but European shares in the Stoxx 600 index fell 2.4%.
The Governing Council judges that interest rates still need to rise significantly at a steady pace to reach levels restrictive enough to ensure inflation returns to its medium-term target of 2 percent in time.
The central bank said it was conducting “severely revised” inflation projections and saw inflation remain above its target of 2 percent until 2025.
Average inflation is now expected to be 8.4% in 2022, 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025.
However, the economic downturn in the region is “relatively short-lived and shallow”.
The latest inflation data for the euro zone comes after prices showed a small rise in November, albeit at a 10% annual rate.
In a press conference following the announcement, ECB President Christine Lagarde told CNBC’s Annette Weisbach, “One of the key messages besides the hike is that it’s not just an indication that we’re going to raise interest rates further, which we’ve said before. We’ve assumed that interest rates will have to be raised significantly today, on hold.”
“Based on the information we have now, a significant increase in the steady rate means we will have to raise interest rates by 50 basis points for some time,” she said.
Regarding the announcement on quantitative tightening, she said the ECB wanted to follow the principles of “predictable and measurable”.
The central bank’s decision to cut an average of 15 billion euros over a four-month period, representing about half of all redemptions over that period, was based on advice from the market group and all central bank and other officials involved in the decision. , Lagarde explained.
“Given that the key tool is the interest rate, it seemed like an appropriate number to normalize our balance sheet,” she says.
The US Federal Reserve increased its key rate by 0.5% on Wednesday, as did the Bank of England and the Swiss National Bank on Thursday morning.
“Unlike the Bank of England, the language is given this hawkish gait. [quantitative tightening] And last first day,” BMO Capital Markets analysts said.
However, he pointed out that the ECB is lagging behind other central banks in reducing its balance sheet and will continue to reinvest through its aggressive emergency purchase program.
“The language in the statement makes sense, and the bank is open to QT,” they wrote in their memo.