ECB Governing Council review: signals continuation of significant interest rate hikes


■ The European Central Bank (ECB) decided to raise interest rates for the fourth meeting in a row, but reduced the rate hike to 0.50 per cent.
■ Tightening to be prolonged as a precaution against upside inflation, but pace of rate hikes to slow in light of economic slowdown.
    The European Central Bank (ECB) raised its key policy rate by 0.50% at its 15 May meeting. It was the fourth consecutive meeting at which the rate was raised, but the rate hike was reduced from September and October (0.75% each). The statement recognised that 'the Bank has decided that it will continue to raise interest rates significantly at a constant pace until they reach a sufficiently constrained level to return inflation to the medium-term target of 2% at the appropriate time'. The principle of normalising asset holdings was also discussed: from March 2023 onwards, asset holdings under the Asset Purchase Programme (APP) will be reduced at a prudent and predictable pace, averaging EUR 15 billion per month until April-June of the same year. Specific measures will be discussed at the Board meeting in February next year.

    The ECB staff's inflation forecasts have been revised sharply upwards to 6.3% in 2023 and 3.4% in 2024, with a new forecast of 2.3% in 2025. It noted that the recession is relatively short-lived and shallow, although the Eurozone economy may contract in the current and next quarters due to the energy crisis, high uncertainty, weakening global economic activity and tight financing conditions. The growth forecast was revised downwards to 0.5% in 2023, but remained unchanged at 1.9% in 2024 and 1.8% in 2025, according to the forecast.

    At the post-Council press conference, ECB President Lagarde maintained her previous view that everything depends on the data, although a 0.50% rate hike is still expected after the next Council meeting (2 February 2023). The pace of rate hikes will be adjusted in line with the progress of quantitative tightening (QT), although many ECB members are reported to have supported a 0.75% hike. QT is a key factor in the ECB's decision to raise interest rates. At present, the final destination for the 'Central Bank Deposit Rate' is increasingly being factored in at 3.00-3.25% by mid-2023, with almost no market participants expecting a rate cut before the end of that year.