The ECB raises rates by 25 basis points. “Inflation still too high”

MILAN – The ECB raises rates by 25 basis points as expected. It does so by reiterating that the prospects for inflation remain “too high and for too long”, thus moving as the market expected even though there were rumors that indicated an even more radical decision as possible to raise by 50 points in line with the recent past. From 10 August, therefore, the main rate will be at 3.75%, that of the marginal refinancing at 4% and that on deposits with the ECB at 3.25%.

The ECB’s decision comes in the aftermath of the move US Federal Reserve, which raised rates by 25 basis points but also signaled it was close to the threshold of a “possible pause”. For Washington, there are ten increases since the restrictive cycle began, Frankfurt arrives today at the seventh. “Overall”, reads the note released at the end of the board, “the incoming information broadly supports the assessment of the medium-term inflation outlook made by the Governing Council at the previous meeting. Headline inflation has declined in recent months, but Underlying price pressures remain strong. At the same time, past rate hikes are forcefully being transmitted to euro area financial and monetary conditions, while the lags and strength of the transmission to the real economy remain uncertain.” .

Analysts’ expectation was for this amount of upside. Mirabaud AM also remarked that the hawks have arguments for asking for more: “They will focus on still improving growth, too high inflation and strong growth in nominal wages; while the more dovish members (doves, ed) will underline the weakness of domestic demand, the slowdown in inflation and the negative growth of real wages”, wrote Gero Jung. For the future, “there is the risk that the ECB will adopt a less aggressive policy of rate hikes. We note that while PMI surveys give a solid picture of businesses, actual GDP growth in the first quarter was low, up just 0.1% from the previous quarter. Furthermore, the banking data suggests that banks have adopted tighter credit conditions, which is likely to lead to a further slowdown in economic growth – another argument in favor of more prudent monetary policy,” adds Jung.

For now, the ECB says it will continue to approach rate moves relying on data and – reiterated the president Christine Lagarde during the press conference – that “future decisions of the Governing Council will ensure that official rates are brought to sufficiently restrictive levels to achieve a timely return of inflation to the medium-term objective of 2% and will be maintained at these levels for as long as necessary”.

If rates remain the main tool for governing prices, the Central Bank announces that the Governing Council “will continue to reduce the portfolio of purchase program of assets of the Eurosystem at a measured and predictable pace”. It will therefore cut by 15 billion a month until June and it is expected to “interrupt the reinvestments” of the securities purchase program “starting from July 2023”. For that which is about the program Peppthe one launched during the pandemic, reinvestments are expected throughout 2024.

Mortgages, here’s how the installment changes with the rise in ECB rates. Fixed or variable, which to choose?

by Luigi dell’Olio

04 May 2023

On the banking sector turmoil, the ECB’s toolbox is “fully equipped” to provide “liquidity support to the financial system of the euro area, if necessary”, the Central Bank recalls again in its statement. The transmission protection tool, notes the ECB, “is available to counteract unjustified and disorderly market dynamics that represent a serious threat for the transmission of monetary policy to all euro area countries, thereby enabling the Governing Council to fulfill its price stability mandate more effectively”.