(Frankfurt) The European Central Bank (ECB) slowed the pace of its monetary tightening on Thursday, but showed its determination to continue its substantial rate hikes to combat desperately high inflation.
“We still have a long way to go”, “we must go further”, “we are in a long game”: Christine Lagarde multiplied the formulas to convey the message of firmness from the ECB which held its last meeting in an eventful year.
Like the US Federal Reserve (Fed) on Wednesday and the Bank of England (BoE) on Thursday, the ECB decided to slow down and opted for a half-point increase in its key rates.
This increase brings the rates remunerating undistributed bank cash in loans to 2% and that on short-term refinancing operations to 2.50%, the highest since the end of 2008.
After long years of cheap money, the institution has been conducting a shock interest rate policy since the summer aimed at cooling economic activity, in the hope of taming soaring prices.
The pace of rate hikes is the fastest since the creation of the ECB in 1999, with two “jumbo” increases of 0.75 points in September and October.
Deflate the balance sheet
And the ECB does not intend to stop there: “significant” rate hikes are yet to come, because “inflation remains far too high and is expected to remain above target for too long”, said the Board of Governors following its meeting.
Another sign that the ECB remains combative: it has kicked off the reduction of its balance sheet swollen by years of massive debt purchases to support the economy during periods of crisis.
From next March, the institution will reduce its stock of bonds currently by 3.3 trillion euros “by not reinvesting all of the principal repayments of maturing securities”.
This reduction will be at the rate of 15 billion euros per month on average until the end of June, before being adjusted again.
It is “a decision with a rather bellicose tone”, commented Jens-Oliver Niklasch, of the bank LBBW.
“The rise in interest rates was expected. On the other hand, the fact that it can probably continue at the same pace will surprise many,” he added.
The “crusade” continues
Christine Lagarde hammered home this during her press conference: “We should expect us to increase interest rates at a rate of 0.50 basis points for some time”.
“The ECB’s crusade to fight not only against inflation, but also against any deterioration of its reputation and credibility continues,” commented Carsten Brzeski, analyst at ING Bank.
The inflation curve admittedly flattened a little in November, at 10% over one year, against 10.6% the previous month, thanks to a lull in energy costs.
But the rise in prices should remain permanently well above the 2% target posted by the central bank, according to updated forecasts published on Thursday.
Inflation is expected to rise to 6.3% next year from 5.5% previously forecast, before declining to 3.4% in 2024 and 2.3% in 2025.
A worrying element for the guardians of the euro: their forecasts anticipate “wage growth at rates well above historical averages” as wage demands multiply to compensate for the loss of purchasing power linked to soaring prices .
Eurozone GDP (Gross Domestic Product) is expected to contract in late 2022 and early next year due to the energy crisis and tighter financing conditions, but this recession would be “short and shallow “, according to the ECB.
Over the whole of 2023, the central bank forecasts GDP growth of 0.5% in the euro zone, against 0.9% forecast in September, then 1.9% in 2024.
The ECB, accused of laxity a year ago in the face of price increases, has definitely made its choice, believe analysts at Berenberg: it is ready “to accept some economic suffering in the short term to bring inflation back to its objective “.
