Euro Area 3-Month EURIBOR (%, eop)

ECB hikes rates by 50 basis points in March; drops explicit reference to further hikes

At its 16 March meeting, the European Central Bank (ECB) hiked the main refinancing operations rate, the marginal lending facility and the deposit facility rates by 50 basis points to 3.50%, 3.75% and 3.00%, respectively. However, due to recent financial turbulence sparked by the collapses of several regional U.S. banks and problems at Credit Suisse, the ECB dropped any explicit reference to additional hikes ahead, emphasizing a data-dependent approach in the meetings to come.

On top of this, the Bank stated that the pace of reduction of its asset purchase program (APP) portfolio, which started in March 2023, is consistent with the planned EUR 15 billion decrease per month, and reiterated that it will continue at this pace until June 2023. It also restated that the subsequent pace of reduction would be determined over time. Lastly, the ECB reiterated that it would reinvest the principal payments from maturing securities purchased under the pandemic emergency purchase program (PEPP) until at least the end of 2024—providing support to heavily indebted Southern European governments.

The decision to continue hiking was driven by still-elevated, albeit declining, headline inflation and rising core inflation. Meanwhile, the Bank now sees inflation averaging 5.3% this year, 2.9% in 2024 and 2.1% in 2025, while it expects the economy to expand 1.0% this year and 1.6% in both 2024 and 2025.

The Bank no longer mentioned additional tightening in its most recent release, conscious of the financial turmoil caused by a creaky U.S. banking sector and potential spillovers on the Eurozone’s financial institutions. Given this backdrop, it tried to reassure markets that its “policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed”. However, it kept the door open to further hikes, stating that it “stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term”.

Commenting on the ECB’s balancing act, Carsten Brzeski, global head of macro at ING, noted:

“All in all, today’s decision and communication leave the door open to heated debates at the next meetings. It should be clear that with any further rate hike the risk that something breaks increases. Therefore, today’s decisions could mark the start of the final phase of the ECB’s tightening cycle: a slowdown in the pace, size and number of any further rate hikes.”

The next monetary policy meeting is scheduled for 4 May.