ECB hikes 3 key interest rates by 50 bps, hopes to raise them further

The European Central Bank (ECB) governing council yesterday decided to raise the three key interest rates by 50 basis points and, based on the substantial upward revision to the inflation outlook, expects to raise them significantly further. The governing council also discussed principles for normalising the Eurosystem’s monetary policy securities holdings.

The euro area economy may contract in the current quarter and the next quarter, owing to the energy crisis, high uncertainty, weakening global economic activity and tighter financing conditions, ECB said in a release.

The European Central Bank (ECB) governing council yesterday decided to raise the three key interest rates by 50 basis points and, based on the substantial upward revision to the inflation outlook, expects to raise them significantly further. The governing council also discussed principles for normalising the Eurosystem’s monetary policy securities holdings.

In particular, the governing council feels interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2 per cent medium-term target.

Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations.

According to Eurostat’s flash estimate, inflation was 10 per cent in November, slightly lower than the 10.6 per cent recorded in October. The decline resulted mainly from lower energy price inflation.

Food price inflation and underlying price pressures across the economy have strengthened and will persist for some time.

Amid exceptional uncertainty, Eurosystem staff have significantly revised up their inflation projections. They now see average inflation reaching 8.4 per cent in 2022 before decreasing to 6.3 per cent in 2023, with inflation expected to decline markedly over the course of the year.

Inflation is then projected to average 3.4 per cent in 2024 and 2.3 per cent in 2025. Inflation excluding energy and food is projected to be 3.9 per cent on an average this year and to rise to 4.2 per cent next year, before falling to 2.8 per cent in 2024 and 2.4 per cent in 2025.

According to the latest Eurosystem staff projections, a recession would be relatively short-lived and shallow. Growth is nonetheless expected to be subdued next year and has been revised down significantly compared with the previous projections.

Beyond the near term, growth is projected to recover as the current headwinds fade. Overall, the Eurosystem staff projections now see the economy growing by 3.4 per cent in 2022, 0.5 per cent in 2023, 1.9 per cent in 2024 and 1.8 per cent in 2025.

Fibre2Fashion News Desk (DS)