Euro Area: ECB hikes rates by another 75 basis points in October; hints at more gradual tightening ahead

Euro Area Monetary Policy October 2022

Euro Area: ECB hikes rates by another 75 basis points in October; hints at more gradual tightening ahead

At its 27 October meeting, the European Central Bank (ECB) hiked the main refinancing operations, the marginal lending facility and the deposit facility rate by 75 basis points each to 2.00%, 2.25% and 1.50%, respectively. The increase, which matched market expectations, takes rates to the highest level since 2009. On top of this, the Bank announced that it will tighten the terms and conditions of the third series of ultra-cheap loans to commercial banks—targeted longer-term refinancing operations (TLTRO), whose amount exceeds EUR 2 trillion—to reinforce the transmission mechanism. Lastly, it also lowered the interest rate it pays on minimum reserves by 50 basis points, bringing it in line with the ECBs deposit facility rate.

The decision to continue hiking rates vigorously was driven by surging inflation despite cooling economic activity and greater recession risks. Inflationary pressures have continued to intensify as the fallout from Russias invasion of Ukraine hits trade and supply chains, pushing up energy and commodity prices. Moreover, price rises have broadened as the post-pandemic demand recovery, supply constraints and higher energy and production costs filter through to core consumer prices.

The Banks guidance pointed to additional tightening, although it substituted a previous reference to increases continuing for “several meetings” for mentioning that borrowing costs set to be raised further, suggesting a softer pace of tightening. The Bank stated that additional hikes will be “data-dependent and follow a meeting-by-meeting approach”, meaning that the timing and size of such hikes will be contingent on the evolution of prices and the inflation outlook.

Commenting on the ECBs decision, Carsten Brzeski, global head of macro at ING, noted:

“The press conference after the rate hike announcement showed that the European Central Bank (ECB) is determined to continue hiking interest rates. However, while today’s jumbo hike was a no-brainer, we expect much more controversial discussions in December and an end to the hiking cycle in February next year.”

The next monetary policy meeting is scheduled for 15 December.

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