2023-06-15 12:21:24
No pause in the rise in European Central Bank rates. The Frankfurt institution proceeded to raise its key rates again – the eighth in a row – by a quarter of a point. The deposit rate rose to 3.5%, the refinancing rate to 4% and the marginal lending rate to 4.25%. The deposit rate is now at its highest level since May 2001.
This decision was expected. All members of the Board of Governors who have recently spoken, including the most moderate, have hinted that he would have a 25 basis point tightening. Starting with the president of the institution Christine Lagarde.
Inflationary pressures
Admittedly, headline inflation decelerated in May. But the Frenchwoman again hammered before MEPs that there were no clear signs that underlying inflation (excluding energy and food prices) had peaked. She expressed particular concern about inflationary pressures caused by wage increases.
The ECB has also published its new economic projections. On the whole, they confirm the forecasts of last March. But underlying inflation expectations have been revised upwards for 2023 and 2024.
Those relating to European growth have been lowered, in particular to take into account the fact that the euro zone has entered a slight recession. A sign that monetary tightening is beginning to bear fruit, as is the contraction in bank lending activity in the eurozone. This should not deflect the ECB.
One or two rises
On Wednesday, after 10 consecutive tightenings, the US Federal Reserve chose to maintain the status quo on its rates. While indicating that it could resume increases if necessary. On the side of Frankfurt, the message remains firm. During the last meetings, Christine Lagarde has often underlined the extent of the path still to be covered in the fight against inflation. The ECB reiterated this analysis and reminded that decisions will be taken first and foremost on the data.
However, the debate has intensified in recent weeks within the Governing Council. While it appears that the ECB is no longer very far from its terminal rate (the one at which it will stop its hikes), opinions are divided on the advisability of proceeding with a turn of the screw in September, after the one which seems to have been acquired in July. The strongest proponents of monetary orthodoxy are pushing for a continuation of the tightening cycle.
The fact that the central bank is raising its inflation forecasts, and the wording used in the speech (determination to ensure that inflation returns to the level of the 2% objective in the medium term as soon as possible) leave the door open several rate hikes. “The ECB cannot afford to be wrong about inflation, analyzes Carsten Brzeski, at ING. The Bank wants and needs to be sure that it has killed the inflation dragon before considering a policy change. »
End of reinvestments
The ECB has also confirmed the definitive cessation of reinvestments under its main asset purchase program (APP). That is to say, it will let the bonds in its portfolio reach maturity without buying back other securities with the amounts resulting from these repayments. It had already reduced to 15 billion euros its monthly intervention on the markets under the reinvestments of the APP. Liquidity withdrawal should now approach 30 billion per month.
The objective is to deflate the balance sheet of the central bank which has reached stratospheric levels (nearly 9,000 billion euros) as part of the measures to help the economy. More than the halt in bond purchases, it is the redemption of the TLTROs that should have the greatest impact in terms of reducing the balance sheet. The banks will in fact repay more than 500 billion euros of these long-term loans at very attractive rates on 30 June.
The ECB has no plans to extend these TLTROs, nor to propose a new source of exceptional financing. This could pose a problem for certain small banking establishments, particularly in southern Europe, which do not necessarily have the deposits necessary to repay all of their due. Questioned previously, Christine Lagarde had indicated that the refinancing facility of the ECB – now at 4% – was available to deal with this situation. However, the press release specifies that the central bank will monitor the effects of the end of these loans on its monetary policy.
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