MNI ECB WATCH: ECB Hikes 25Bps, Signals APP Reinvestments End

The European Central Bank raised key interest rates by 25bp on Thursday and signalled more hikes to come in order to boost rates to "sufficiently restrictive" levels to ensure a timely return to its 2% inflation target.

After its meeting, the ECB also announced its intention to end reinvestments from the asset purchase programme (APP) “as of July,” while assessing regularly the tightening effects of repayments of its its targeted longer-term refinancing operations (TLTROs).

Underlying price pressures remain strong despite a decline in headline inflation over recent months, the Governing Council concluded, with president Christine Lagarde insisting that the ECB still has ground to cover despite slowing the pace of rate hikes. A line about raising rates to "sufficiently restrictive" levels was added to the statement. (See MNI SOURCES: ECB To Hold Rates At Peak Into 2024)

The deposit rate rose to 3.25% following the decision, with the main refinancing rate and marginal lending facility increasing to 3.75% and 4.0%, respectively.

The runoff of reinvestments from APP - set at a monthly average of EUR15 billion until the end of June - is now expected to increase to around EUR25 billion per month.

DETERMINED MOOD

Governing Council members were in “determined” mood, Lagarde said, with all agreeing that a rate increase of between 25 and 50bp had been necessary. It was sensible to return to a “more standard” 25bp increment, after earlier larger hikes, she added, on the understanding that further increases are likely to follow.

Cumulative rate rises are already having an impact, as evidenced in the recent bank lending survey which showed a substantial net tightening of credit conditions, she said.

While she stressed that more than one further hike was likely, Lagarde stopped short of providing a likely cycle peak.

Thanks to an accelerated process of TLTRO reimbursement the ECB has so far avoided “cliff effects’” caused by the winding down of its cheap loans to banks, Lagarde said, with “a lot” of liquidity still remaining in the system to cover future repayments.

Equally, the ECB stands ready to provide additional liquidity if needed, and has demonstrated its inventiveness in that regard in the past. (See MNI SOURCES: ECB Set For TLTRO Discussions Ahead June Maturity)