Posted 2 Feb. 2023 at 02:36 PMUpdated Feb 2. 2023 at 6:30 PM
The European Central Bank is not pausing in its fight against inflation. The Frankfurt institution raised its key rates by 50 basis points. The deposit rate rose to 2.5%, the refinancing rate to 3% and the marginal lending rate to 3.25%. They reached levels not seen since November 2008. Last July, the deposit rate was still in negative territory, at -0.5%.
Such a rise is not a surprise. ECB President Christine Lagarde had warned that she would raise rates of this magnitude for February during the december monetary policy meeting .
Flawless determination
The central bank has done it again, announcing with almost certainty a new tightening of 50 basis points at its next meeting, which will be held on March 16. “We still have a long way to go” in rate hikes, warned the Frenchwoman during her press conference.
Christine Lagarde highlighted the good performance of the European economy , which “has held up better than expected and should improve over the next few quarters”, and a still tight labor market. Factors that could hamper the decline in inflation. Especially since core inflation (excluding energy and food) did not decrease in January. The President of the ECB insisted on the fact that the slowdown in the rise in prices in January (8.5% against 9.2% in December) was mainly due to the drop in energy costs.
But the French also recognized that the inflationary risk was lower than before. And by announcing that after March the ECB would adopt a “meeting-by-meeting” and “depending on available data” approach, it opened the door to a slowing down of the pace, or even a pause.
Credit crunch
Above all, it seems that the debates are more animated within the Governing Council, and that the doves – which advocate a more moderate approach to monetary policy – are regaining ground. “Christine Lagarde’s emphasis on finding a consensus would be consistent with a more cautious approach beyond March, unless core inflation continues to surprise on the upside”, analyzes Frederik Ducrozet at pictet.
In fact, it is only from now – at the earliest – say the economists, that we can begin to see the effects of the monetary tightening initiated in July. And the latest study by the ECB shows that credit conditions have already tightened sharply in the euro zone reaching 2011 levels.
Already relieved by the speech less hard than expected of the US Federal Reserve, investors have in any case bet on a future softening of the Central Bank’s position. “Market players have noted this possibility and have lowered their expectations for the ECB’s terminal rate (the level where it will stop its increases, editor’s note) in the summer by 15 basis points”, underlines Jean Marc Delfieux at Tikehau Capital. . They now estimate it at 3.35%.
In the wake of Christine Lagarde’s press conference, the yield on European government bonds fell sharply. The French 10-year rate closed down 25 basis points, its German equivalent fell by 23 basis points, and the Italian 10-year by 40 basis points. An optimism deemed “hasty”, however, by many analysts, including those of Aurel BGC or ING.
Green reinvestments
The other point on which the central bank was expected on Thursday was the deflation of its balance sheet . This is approaching 9,000 billion euros, including 5,000 billion in bonds acquired since 2015, to support the economy in the face of significant deflationary pressures – particularly during the Covid crisis. From March, it will thus reduce its interventions on the market by 15 billion euros per month.
The remaining reinvestment amount – in terms of sovereign bonds – will be allocated country by country, in proportion to the reimbursements received. For purchases of corporate bonds, on the other hand, the central bank has formalized a change in the rules of the game. Reinvestments will be directed primarily “towards issuers with better climate performance”, explains the ECB.