ECB raised key rates by 50 bps in its February monetary policy decision following a 50-bps rate hike in December, and matching expectations from most analysts. EU borrowing costs are at the highest level since late 2008 and ECB President pledged to deliver another 50bps rate hike at its next monetary policy meeting in March. The deposit facility rate is now 2%, the refinancing rate 2.5% and the marginal lending to 2.75%, a level not seen in fourteen years.
The central bank announced the APP portfolio would decline by €15 billion per month on average from the beginning of March until the end of June 2023, and the subsequent pace of portfolio reduction would be determined over time.
Policymakers expect to raise interest rates further, to ensure the timely return of 2% inflation target. Inflation forecasts were revised higher last meeting, with average inflation seen reaching 8.4% in 2022 before decreasing to 6.3% in 2023. Inflation is then projected to average 3.4% in 2024 and 2.3% in 2025.
ECB Monetary Policy Decision 2 February 2023
- Main refinancing rate 3.00% vs 3.00% expected Prior 2.50%
- Deposit facility rate Deposit facility rate 2.50% vs 2.50% expected Prior 2.00%
- Marginal lending facility 3.25% Prior 2.75%
Highlights
- Intends to raise interest rates by another 50 basis points at its next monetary policy meeting
- Will then evaluate the subsequent path of its monetary policy
- Will stay the course in raising interest rates significantly at a steady pace
- And keep them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target
- Future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach
Market Reaction
EURUSD moved to the upside above the January highs of 1.09285. Above are swing levels from March and April 2022 that come between 1.0935 and 1.0943. Getting back above those levels would once again open the door for the buyers to try and take back more control.
ECB Projections (Dec Meeting)
ECB staff forecasts for inflation:
- 2022 8.4% vs 8.1% prior
- 2023 6.3% vs 5.5% prior
- 2024 3.4% vs 2.3% prior
- 2025 2.3%
ECB staff forecasts for GDP:
- 2022 3.4% vs 3.1% prior
- 2023 0.5% vs 0.9% prior
- 2024 1.9% vs 1.9% prior
- 2025 1.8%
NB LTRO (Targeted Longer-Term Refinancing Operations) is best described as a long term loan to banks to increase loan creation. The banks lend above a specified benchmark and borrow from the ECB at a negative rate. This will provide an incentive for the banks to lend and thus increase private spending in the economy. That’s the theory clearly has not been a great success so far.
Full Statement by the ECB 2 February 2023
The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target. Accordingly, the Governing Council today decided to raise the three key ECB interest rates by 50 basis points and it expects to raise them further. In view of the underlying inflation pressures, the Governing Council 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. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. In any event, the Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.
The Governing Council today also decided on the modalities for reducing the Eurosystem’s holdings of securities under the asset purchase programme (APP). As communicated in December, the APP portfolio will decline by €15 billion per month on average from the beginning of March until the end of June 2023, and the subsequent pace of portfolio reduction will be determined over time. Partial reinvestments will be conducted broadly in line with current practice. In particular, the remaining reinvestment amounts will be allocated proportionally to the share of redemptions across each constituent programme of the APP and, under the public sector purchase programme (PSPP), to the share of redemptions of each jurisdiction and across national and supranational issuers. For the Eurosystem’s corporate bond purchases, the remaining reinvestments will be tilted more strongly towards issuers with a better climate performance. Without prejudice to the ECB’s price stability objective, this approach will support the gradual decarbonisation of the Eurosystem’s corporate bond holdings, in line with the goals of the Paris Agreement.
The detailed modalities for reducing the APP holdings are described in a separate press release to be published at 15:45 CET.
Key ECB interest rates
The Governing Council decided to raise the three key ECB interest rates by 50 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.00%, 3.25% and 2.50% respectively, with effect from 8 February 2023.
Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)
The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP until the end of February 2023. Subsequently, 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.
As concerns the PEPP, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme 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 Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.
Refinancing operations
As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations are contributing to its monetary policy stance.
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The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term. The Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:45 CET today.
Alternate player (audio: en,fr,de) Watch on Twitter @ECB
Live. https://www.ecb.europa.eu/home/html/index.en.html
Source: European Central Bank
From The TradersCommunity Research Desk