OPINION
Market Rating Before FOMC MeetingJan 31
European Central Bank Raises Interest Rates by 50 Basis Points
The decision of the European Central Bank (ECB) on the critical monetary policy meeting of July 20 – 21 was published today.
After an 11-year break, the Bank increased interest rates by 50 basis points for each. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 0.50%, 0.75% and 0.00% respectively, with effect from 27 July 2022. Market expectations were that the Bank would tighten by 25 basis points.
he Governing Council judged that it is appropriate to take a larger first step on its policy rate normalisation path than signalled at its previous meeting. It was pointed out that this decision will support the return of inflation to the Governing Council’s medium-term target by strengthening the anchoring of inflation expectations and by ensuring that demand conditions adjust to deliver its inflation target in the medium term.
According to the decision report, the frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions. In addition, the Council reported that the decision would help achieve the 2 percent inflation target in the medium term.
In the context of its policy normalisation, the Governing Council will evaluate options for remunerating excess liquidity holdings.
The Governing Council assessed that the establishment of the TPI is necessary to support the effective transmission of monetary policy. The TPI will be an addition to the Governing Council’s toolkit and can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area.And the scale of TPI purchases depends on the severity of the risks facing policy transmission.
Accordingly, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024.
In addition, the Governing Council will continue to monitor bank funding conditions and ensure that the maturing of operations under the third series of targeted longer-term refinancing operations (TLTRO III) does not hamper the smooth transmission of its monetary policy. Finally, the Council reiterated that all instruments are ready to be adjusted within its mandate in order to ensure that inflation stabilizes at the 2 percent target in the medium term.
ECB President Christina Lagarde, who made a speech after the critical meeting, said that the realization of inflation risks requires a larger rate hike, while the decision taken will help achieve its medium-term goals.
Expressing that they will evaluate the options in the context of policy normalization, Lagarde pointed out that price pressures are spreading to more and more sectors, stressing that the rise in inflation pressures is due to the weak euro. The fact that President Lagarde said that they expected inflation to remain too high to be desirable for some time was also significant.
Noting that the war in Ukraine continues to hamper economic activity and growth, President further noted that companies continue to face high costs and supply chain disruptions. Stressing that the outlook for the second half of the year and beyond is still uncertain, she told that global energy prices may continue to remain high in the near term.
Lagarde added that they will make their interest rate decision based on macroeconomic data, but the expectation of a 50 basis point rate increase for September is no longer very valid.
After an 11-year break, the Bank increased interest rates by 50 basis points for each. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 0.50%, 0.75% and 0.00% respectively, with effect from 27 July 2022. Market expectations were that the Bank would tighten by 25 basis points.
he Governing Council judged that it is appropriate to take a larger first step on its policy rate normalisation path than signalled at its previous meeting. It was pointed out that this decision will support the return of inflation to the Governing Council’s medium-term target by strengthening the anchoring of inflation expectations and by ensuring that demand conditions adjust to deliver its inflation target in the medium term.
According to the decision report, the frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions. In addition, the Council reported that the decision would help achieve the 2 percent inflation target in the medium term.
In the context of its policy normalisation, the Governing Council will evaluate options for remunerating excess liquidity holdings.
The Governing Council assessed that the establishment of the TPI is necessary to support the effective transmission of monetary policy. The TPI will be an addition to the Governing Council’s toolkit and can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area.And the scale of TPI purchases depends on the severity of the risks facing policy transmission.
Accordingly, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024.
In addition, the Governing Council will continue to monitor bank funding conditions and ensure that the maturing of operations under the third series of targeted longer-term refinancing operations (TLTRO III) does not hamper the smooth transmission of its monetary policy. Finally, the Council reiterated that all instruments are ready to be adjusted within its mandate in order to ensure that inflation stabilizes at the 2 percent target in the medium term.
ECB President Christina Lagarde, who made a speech after the critical meeting, said that the realization of inflation risks requires a larger rate hike, while the decision taken will help achieve its medium-term goals.
Expressing that they will evaluate the options in the context of policy normalization, Lagarde pointed out that price pressures are spreading to more and more sectors, stressing that the rise in inflation pressures is due to the weak euro. The fact that President Lagarde said that they expected inflation to remain too high to be desirable for some time was also significant.
Noting that the war in Ukraine continues to hamper economic activity and growth, President further noted that companies continue to face high costs and supply chain disruptions. Stressing that the outlook for the second half of the year and beyond is still uncertain, she told that global energy prices may continue to remain high in the near term.
Lagarde added that they will make their interest rate decision based on macroeconomic data, but the expectation of a 50 basis point rate increase for September is no longer very valid.
