On Thursday, December 15, one day after the Federal Reserve announced a 50 basis point interest rate hike, the European Central Bank (ECB) also announced a smaller hike, raising interest rates from 1.5 percent to 2 percent.
ECB unveils new rate hike
However, the bank said it would proceed with rate hikes “significant“in the future to control inflation and reduce its balance sheet. Beginning in March 2023, the ECB plans to reduce its balance sheet by an average of 15 billion euros ($15.9 billion) per month. This would then continue until the end of the second quarter of 2023.
In February, the ECB will reveal more details on the reduction of the asset purchase program (APP). In the meantime, it will continue to reassess its position to stay on track with its monetary policy strategy. Earlier this year, in July, the ECB raised interest rates by 50 basis points.
Later, in September and October, it raised them by 75 basis points each, moving interest rates out of negative territory for the first time in eight years. In a statement released Thursday, the ECB noted:
“The Governing Council is of the view that interest rates will still need to increase significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2 percent objective over the medium term.”
ECB not about to pivot
Global financial markets are in turmoil and it is only a matter of time before the ECB decides to pivot. However, ECB President Christine Lagarde has made her intentions clear, adding that the ECB is not going to pivot any time soon.
“Anyone who thinks this is a pivot for the ECB is wrong. We’re not pivoting, we’re not wavering, we’re being resolute and resilient in continuing where we have been. … If you compare it to the Fed, we have further to go. We have more time to go. We are not slowing down. We’re in it for the long haul“, she said.
The central bank said it expects inflation in the eurozone to remain above 2 percent through 2025. It expects average inflation to fall to 6.3 percent in 2023, 3.4 percent in 2024 and 2.3 percent in 2025.
Market analysts believe that the Fed’s hawkish stance could lead to a major recession in the coming time. But the ECB believes it would be “relatively short and shallow“. Regarding the decision on quantitative tightening, Lagarde said the ECB wanted to follow the principles of predictability and measurement.
The central bank is looking to reduce its balance sheet over the next year. Ms. Lagarde said the decision was the result of advice from her market team, all central banks and other relevant officials. “This seemed like an appropriate number to normalize our balance sheet, keeping in mind that the key tool is the interest rate” she added.