ECB Raises Interest Rate and Changes Terms of Pandemic Relief to Banks
October 27, 2022
The European Central Bank engineered its third interest rate hike since midyear, a hike of 75 basis points that matches its previous action. The first hike in July amounted to 50 basis points. The new rate structure is a 2.0% refinancing rate flanked by a 1.50% deposit rate and a 2.25% on the marginal lending facility. Rightly or wrongly, investors perceived a less hawkish posture than at the July press conference. Today’s announcement statement includes this:
With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation.
and deletes this:
This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to our two per cent medium-term target. Based on our current assessment, over the next several meetings we expect to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.
But officials again proclaimed that “inflation remains far too high” and casts the latest action in the context of a policy normalization that has further to go. Indeed, the rates are still way, way below on-year inflation of 9.9%. Although Euroland faces a gloomier near-term economic outlook than the United States, failure by the ECB to keep pace with the Fed, whose interest rate is a percentage point above the ECB marginal lending facility rate would risk a depreciation of the euro that would boost import prices in the euro area and exacerbate the problem of restoring price stability.
The ECB did not end the procedure of reinvesting the principal of securities acquired from previous quantitative easing but did announce changes in the terms and rates of loans to banks as pandemic relief. The changes hopefully will encourage early repayment of such support.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: European Central Bank
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