Euro Area: ECB hikes rates by 50 basis points in December; hints at further tightening ahead
At its 15 December meeting, the European Central Bank (ECB) hiked the main refinancing operations, the marginal lending facility and the deposit facility rate by 50 basis points each to 2.50%, 2.75% and 2.00%, respectively. The increase, which matched market expectations, takes rates to the highest levels since 2008.
On top of this, the Bank announced that it will start to reduce its asset purchase programme (APP) portfolio from March 2023, by EUR 15 billion per month on average, until the end of Q2 2023. The subsequent pace of reduction will be determined over time. Lastly, it added that it will reinvest the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP) until at least the end of 2024—providing support to heavily indebted Southern European governments.
The decision to continue hiking was driven by elevated inflation and inflation forecasts, despite cooling economic activity and lingering recession risks. The ECB sees inflation averaging 6.3% next year, 3.4% in 2024 and 2.3% in 2025; it expects inflation to stay above the 2.0% target throughout the forecast period.
Meanwhile, the ECB expects GDP to contract in the current quarter and the first quarter of 2023, with the economy expected to remain in a tough spot throughout 2023. The Bank projects GDP to expand a mild 0.5% next year, 1.9% in 2024 and 1.8% in 2025.
The Banks guidance pointed to additional tightening, stating that it expects to hike rates “significantly further” and at a “steady pace” so that they reach a “sufficiently restrictive” level that will bring inflation to target. That said, the Bank reiterated that future moves depend on the evolution of prices and the inflation outlook and will be determined meeting by meeting.
Commenting on the ECBs decision, Carsten Brzeski, global head of macro at ING, noted:
“While other major central banks have started to prepare for a dovish pivot this week, the ECB took a rather hawkish turn. […] While the eurozone economy is probably still the hardest hit of all major economies by the current energy prices and supply chain frictions, it has the central Bank with the strongest determination to bring monetary policy into restrictive territory. Consequently, after todays meeting, we now expect the ECB to hike interest rates by another 100bp in the first quarter of next year. A final 50bp hike in the second quarter can also no longer be excluded.”
The next monetary policy meeting is scheduled for 2 February.