MNI WATCH: ECB Points To Another 50Bps Hike In March

The European Central Bank raised key interest rates by 50 bps and expects to hike by another half-point in March, ECB President Christine Lagarde said on Thursday, though she also stressed that future policy action will be data-dependent and acknowledged differences between Governing Council members.

February’s monetary policy meeting saw a “very, very large consensus” in favour of two 50bps moves - with today's increase taking the deposit rate to 2.5%, the main refinancing rate to 3.0% and the marginal lending facility to 3.25%, but Lagarde said there was not full agreement on how the ECB should communicate its likely near-term rate path.

“We know we have ground to cover, we know we are not done,” Lagarde told a news conference, adding that the ECB was prepared to keep rates in restrictive territory for as long as necessary to bring inflation back to the 2% target.

In a statement, the Governing Council said it “intends” to carry out another half-point hike in March, when it will evaluate the subsequent path of its monetary policy (See: MNI SOURCES: ECB Doves Eye Smaller Hikes As Inflation Falls)

However, future policy rate decisions will follow a meeting-by-meeting approach, Lagarde emphasised - a strategy some have criticised as confusing. (MNI INTERVIEW: ECB Communications Errors Risk Market Selloff)

INFLATION RISKS MORE BALANCED

Eurozone inflation dipped from 9.2% in December to 8.5% in January, with inflation risks “more balanced” than in December and the economy proving more resilient than feared, Lagarde told journalists. Tightening financial and credit conditions and falling demand for mortgages indicate that monetary policy is passing through into the real economy, she said.

Potential upside risks to the inflation outlook could include a reversal of the recent fall in energy prices and an acceleration in wage rises, though the latter have so far been in line with ECB expectations, the president said.

The ECB also announced more details on its decision to reduce the size of its balance sheet by allowing the portfolio of bonds bought under the Asset Purchase Programme (APP) to decline at an average rate of EUR15 billion per month from March 2023.

Partial reinvestments from APP will be carried out broadly in line with the capital key, while those from corporate bonds will where possible be tilted towards issuers with a better climate performance.