ECB Hikes Interest Rates by 50bps; Signals Need for Further Hikes to Fight Inflation

The European Central Bank (ECB) decided to hike three of its key interest rates by 50 basis points (0.5%) as part of its ongoing war against inflation. The organization stated that further increases are likely to happen “because inflation remains far too high and is projected to stay above the target for too long.”

The European Central Bank (ECB) has explained its economic policy in its war against inflation. The governing council of the body decided to hike the interest rates on its main refinancing operations, its marginal lending facility, and its deposit facility by 50 basis points (bps) across the board. In a press release, the organization explained that this rise is part of a plan to ensure a “timely return” to the 2% levels of inflation formerly faced by the bloc.

This hike is similar to the one applied by the U.S. Federal Reserve on Dec 14, when it also hiked its interest rates by 50bps.

Inflation levels are still far from reaching the 2% target, as numbers estimate that inflation reached 10% during November. However, this shows an improvement over October’s numbers, which were estimated to reach 10.6%.

The ECB hinted at similar interest hikes in the future, stating it “expects to raise them significantly further, because inflation remains far too high and is projected to stay above the target for too long.”

Europe could also experience a recession as a consequence of the measures the ECB has convened to apply. 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.” Nonetheless, the ECB warned about the relative weakness of the economy in the coming years. It declared:

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

The organization also announced it will wind down its Asset Purchase Programme (APP) starting next November, something that was expected by certain analysts, who predict that it will have a negative impact on the bond market. The APP portfolio will be diminished by 15 billion euros each month until the end of the second quarter of 2023. However, the Pandemic Emergency Purchase Programme, which allows the ECB to purchase different types of assets in financial markets, will remain until at least the end of 2024.

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