ECB raises interest rates by 50 points and says more increases are needed to deal with inflation!

The agency said further increases are likely to occur “because inflation remains far too high and is expected to remain above target for too long.“

ECB follows Federal Reserve in raising interest rates by 50 basis points

The European Central Bank (ECB) has clarified its economic policy in its war on inflation. The organization’s governing council decided to raise interest rates on its main refinancing operations, marginal lending facility and deposit facility by 50 basis points (bps) across the board. In a press release the ECB explains that the increase is part of a plan to ensure a “rapid return” to the 2% inflation levels that the European Union was previously facing.

The increase is similar to the one implemented by the U.S. Federal Reserve on December 14, when it also raised interest rates by 50 basis points.

Inflation levels are still a long way from reaching the 2 percent target, as figures estimate that inflation reached 10 percent in November. However, this is an improvement from October’s estimated 10.6%.

The ECB hinted at similar interest hikes in the future, saying it “expects to raise them further substantially, as inflation remains far too high and is likely to remain above target for too long.”

Possible recession

Europe could also experience a recession as a result of the measures the ECB has decided to implement. The Eurosystem, a body integrated by the ECB and the other central banks in the region, has predicted that a possible recession would be relatively “short-lived and shallow“. Nevertheless, the ECB warned of relative weakness in the economy in the years ahead. It stated:

The euro area economy may contract in the current and next quarters, due to the energy crisis, high uncertainty, weakening global economic activity, and tighter financing conditions.

The agency also announced that it would end its asset purchase program (APP) from next November, which was already anticipated by some analysts, who expect it to have a negative impact on the bond market. The APP portfolio will be reduced by 15 billion euros each month until the end of the second quarter of 2023. However, the emergency pandemic purchase program, which allows the ECB to buy different types of assets in the financial markets, will continue at least until the end of 2024.