OPINION
Market Rating Before FOMC MeetingJan 31
ECB Goes for a Rate Hike in July
The fourth meeting of the European Central Bank's (ECB) Monetary Policy Board of the year, dated June 8 – 9, was completed at 13:45 (GMT+2).
In line with the market expectations, the bank kept the refinancing operation interest rate at 0.0 percent, the deposit facility rate at minus 0.50 percent and the marginal lending facility rate at 0.25 percent.
The Board of Directors announced its decision to end its net purchases under the Asset Purchase Program (APP) as of July 1, 2022. Concerning the Pandemic Emergency Purchase Program (PEPP), it reiterated that they aim to reinvest principal payments from overdue securities purchased by at least the end of 2024.
The Board stated that the inflation, which was pointed out as a major challenge in the resolution text, will return to the 2 percent target in the medium term. In addition, it was pointed out that energy and food prices, which increased with the effects of the Russia-Ukraine war, were the main determinants of the recent rise in inflation and that price pressures spread throughout.
Council Members stated in the text that they plan to increase interest rates by 25 basis points at their monetary policy meeting in July. In the September meeting, they pointed out that if the inflation outlook worsens, this step could be further expanded and it was noted that they aim for a gradual and sustainable interest rate increase after September.
Committee Members, who raised their inflation forecasts for 2022 from 5.1 percent to 6.8 percent, revised their 2023 forecasts to 3.5 percent from 2.1 percent and their 2024 forecasts to 2.1 percent from 1.9 percent. However, the officials reflected that the future of a decrease in inflation is expected due to the moderate course of energy costs, easing of supply disruptions due to the pandemic, and normalization of monetary policy.
In addition, the Bank noted that the Ukrainian war has disrupted trade, led to cost shortages and increased high energy and commodity prices, while mentioning that these factors will have a negative impact on growth in the near term. In this regard, the ECB revised its gross domestic product (GDP) growth forecast to 2.8 percent from 3.7 percent for 2022, while reducing it to 2.1 percent from 2.8 percent for 2023. And ECB also predicted 2.1 percent for 2024.
On the other hand, the maturation of the operations under the third series of targeted long-term refinancing operations (TLTRO III) will ensure the smooth execution of monetary policy, officials said. They also noted that they will regularly evaluate how targeted lending contributes to the monetary policy stance, and noted that the special conditions applicable under TLTRO III will expire on June 23, 2022.
ECB President Christina Lagarde, who spoke to the press after the completed critical meeting, said that inflation was undesirably high, while inflation indicated that the pressure was expanding and that it would continue to remain high for some time.
Lagarde, who signaled that economic activity will weaken in the near term
due to high energy prices, said that unemployment is at historic lows and wage growth is starting to increase. Lagarde, however, stated that they carefully evaluated the economic conditions and stated that the Committee Members agreed on the 25 basis point rate hike in July, but that if the inflation outlook deteriorates in September, a rate hike greater than 25 basis points would be appropriate. Lagarde added that they will use all the tools at their disposal for the 2 percent inflation target and provide flexibility on this issue if necessary.
In line with the market expectations, the bank kept the refinancing operation interest rate at 0.0 percent, the deposit facility rate at minus 0.50 percent and the marginal lending facility rate at 0.25 percent.
The Board of Directors announced its decision to end its net purchases under the Asset Purchase Program (APP) as of July 1, 2022. Concerning the Pandemic Emergency Purchase Program (PEPP), it reiterated that they aim to reinvest principal payments from overdue securities purchased by at least the end of 2024.
The Board stated that the inflation, which was pointed out as a major challenge in the resolution text, will return to the 2 percent target in the medium term. In addition, it was pointed out that energy and food prices, which increased with the effects of the Russia-Ukraine war, were the main determinants of the recent rise in inflation and that price pressures spread throughout.
Council Members stated in the text that they plan to increase interest rates by 25 basis points at their monetary policy meeting in July. In the September meeting, they pointed out that if the inflation outlook worsens, this step could be further expanded and it was noted that they aim for a gradual and sustainable interest rate increase after September.
Committee Members, who raised their inflation forecasts for 2022 from 5.1 percent to 6.8 percent, revised their 2023 forecasts to 3.5 percent from 2.1 percent and their 2024 forecasts to 2.1 percent from 1.9 percent. However, the officials reflected that the future of a decrease in inflation is expected due to the moderate course of energy costs, easing of supply disruptions due to the pandemic, and normalization of monetary policy.
In addition, the Bank noted that the Ukrainian war has disrupted trade, led to cost shortages and increased high energy and commodity prices, while mentioning that these factors will have a negative impact on growth in the near term. In this regard, the ECB revised its gross domestic product (GDP) growth forecast to 2.8 percent from 3.7 percent for 2022, while reducing it to 2.1 percent from 2.8 percent for 2023. And ECB also predicted 2.1 percent for 2024.
On the other hand, the maturation of the operations under the third series of targeted long-term refinancing operations (TLTRO III) will ensure the smooth execution of monetary policy, officials said. They also noted that they will regularly evaluate how targeted lending contributes to the monetary policy stance, and noted that the special conditions applicable under TLTRO III will expire on June 23, 2022.
ECB President Christina Lagarde, who spoke to the press after the completed critical meeting, said that inflation was undesirably high, while inflation indicated that the pressure was expanding and that it would continue to remain high for some time.
Lagarde, who signaled that economic activity will weaken in the near term
due to high energy prices, said that unemployment is at historic lows and wage growth is starting to increase. Lagarde, however, stated that they carefully evaluated the economic conditions and stated that the Committee Members agreed on the 25 basis point rate hike in July, but that if the inflation outlook deteriorates in September, a rate hike greater than 25 basis points would be appropriate. Lagarde added that they will use all the tools at their disposal for the 2 percent inflation target and provide flexibility on this issue if necessary.
