As expected, the 25-member ECB Governing Council raised its key rates by 0.75 points for the second time in a row, after the unprecedented rise in September.
The Frankfurt institution is under pressure to contain record inflation, fueled by soaring food and especially energy prices, in the wake of the Russian invasion of Ukraine.
Inflation in the euro zone came close to 10% in September, nearly five times the ECB’s 2% target.
Like other central banks, the ECB is responding with measures aimed at curbing demand by making credit more expensive for households and businesses.
In an economic downturn, this is a tricky choice, but the guardians of the euro believe that letting prices rise is even more harmful than tightening financing conditions.
– Reviews swept away –
“The journey” of monetary normalization is not over, ECB President Christine Lagarde warned the press: “there is still a long way to go” and new increases will occur to try to make lower prices.
How far is the ECB willing to go? Price developments will decide this and decisions will be made “meeting after meeting”, she added.
The guardians of the euro also signaled their determination by deciding on Thursday to reduce the advantages of anti-crisis loans (“TLTRO”) granted in recent years to banks.
By tightening the conditions attached to these loans, the ECB will increase the pressure on borrowing costs.
While European governments are lining up billions of euros to support purchasing power and businesses, the rapid tightening of monetary policy is not always well received.
Taking office this week, the new President of the Italian Council Giorgia Meloni underlined “the risk” represented by interest rate hikes, in particular “for Member States which have a high public debt”.
French President Emmanuel Macron has called for not “breaking demand” to contain inflation.
The “probability of a recession is much more on the horizon,” admitted Christine Lagarde on Thursday.
But she dismissed criticism of monetary policy: raising rates is the “most appropriate decision to restore price stability which is of paramount importance (…) for the prosperity and recovery of the economy” .
She also reminded the governments of the euro zone of their budgetary duty: they must do everything possible “to reduce” the high public debt ratios.
– The balance sheet, next step –
The ECB in July ended more than a decade of ultra-low interest rates to support prices.
With Thursday’s decision, the rate on bank deposits at the ECB, still negative before the summer and serving as a benchmark in a context of abundant liquidity, goes to 1.5%.
The other two key rates, the one applied to banks on refinancing operations over several weeks and the one targeting the day-to-day marginal lending facility, drop to 2% and 2.25% respectively.
The ECB knows it is expected on the delicate subject of reducing its balance sheet, to bring it into line with its efforts to fight inflation.
This balance sheet has climbed to 8,800 billion euros under the effect, in recent years, of asset purchase programs to support the economy.
The ECB is currently reinvesting debt at maturity, continuing its action of flattening long-term borrowing rates.
Stopping these reinvestments will be the institution’s next project to fight inflation, confirmed Ms. Lagarde and decisions will be made “in December”, she warned.
The ECB will have to be skilful to undertake this slimming cure because too abrupt a “quantitative tightening” could lead to new tensions on the financing costs of the States.
