MNI STATE OF PLAY: ECB Frontloads With 75bp Hike, More Coming

The European Central Bank raised all three key interest rates by an unprecedented 0.75% on Thursday, with president Christine Lagarde arguing that a “major step” was necessary to bring inflation back to the Governing Council’s medium-term target of 2% by early 2023 and that more hikes were on the way in coming meetings.

The decision to frontload rate rises came as Eurosystem staff macroeconomic projections anticipated price increases averaging 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024, with risks to the upside from constraints to production, surging energy and food prices or higher than anticipated wage rises. The growth outlook was revised down, to 3.1% in 2022 and 0.9% in 2023.

The Governing Council also removed the 0% interest rate ceiling for remuneration of government deposits until May 2023, with the new ceiling set at the lower of the deposit facility rate or the euro short-term rate. Banks will be able to benefit from a positive deposit rate at the same time as they enjoy low rates on loans from the ECB’s Targeted Longer-Term Refinancing Operations, though Lagarde said TLTRO pricing will be reviewed at some point.

Despite a number of proposals from Governing Council members, the decision to raise rates by three quarters of a point was taken unanimously, Lagarde told journalists (see MNI SOURCES: Both 75, 50BP Still In Play As ECB Readies Hike). Further increases can be expected over the next “several meetings,” she said - a remark she later clarified by saying that bringing inflation back to target in a “timely” fashion will require rate increases over the course of more than two, but probably fewer than five monetary policy meetings.

TERMINAL RATE

Lagarde could not say where either the terminal rate of interest or the equilibrium rate currently lie, “but we are certainly heading there, because that’s where we believe we will deliver on our target.”

Nor would she confirm that as the ECB edges closer to the peak of the rate-hiking cycle that increases will become incrementally smaller. Rather, governors will continue to base their decisions on a meeting-by-meeting basis, with another 75bp hike neither ruled-out nor in.

Asked if the ECB is preparing to wind down reinvestments of securities acquired under its asset purchase programme, Lagarde said that despite there being no present need to maintain an accommodative monetary stance, balance sheet quantitative tightening will only take place when necessary, with interest rates remaining the primary monetary policy tool at present.

Lagarde acknowledged the additional challenges posed to the ECB from fiscal support measures designed to cushion the impact of soaring energy prices, which she said were derived largely from Russia’s “energy blackmail.”

Fiscal measures should be temporary and targeted at the most vulnerable households, in order to limit the risk of fueling inflationary pressures, to improve public spending efficiency and maintain debt sustainability, she said.