The ECB moderates the rise in interest rates to 25 basis points

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The Governing Council of the European Central Bank (ECB) has decided to raise interest rates by 25 basis points, as expected by the market consensus, so that the reference rate for its refinancing operations will be at 3, 75%, while the deposit rate will reach 3.25% and the loan facility will reach 4%.

With this seventh consecutive increase in the price of money, which has reached its highest level since October 2008, the ECB continues to tighten its monetary policy, albeit for the first time since the current cycle of increases began, in July 2022, has reduced the intensity of the rate hike.

“General inflation has decreased in recent months, but underlying pressures on prices remain strong,” the institution said in a statement, stating that the inflation outlook remains “too high for too long”, although it has highlighted that previous rate hikes are being strongly transmitted to monetary and financing conditions in the euro area.

In this sense, the year-on-year inflation rate in the euro area stood at 7% in April, which implies a rise of one tenth compared to the March data, while the core rate, which excludes the effect of energy and food, it moderated for the first time in ten months, standing at 5.6%, one tenth less than the previous month.

Likewise, according to Eurostat, the gross domestic product (GDP) of the euro zone grew by 0.1% in the first quarter of 2023, the first with twenty members of the single currency, after the stagnation registered in the three previous months in the an equivalent comparison with the sum of Croatia, while the unemployment rate in the euro area stood at 6.5% in March, one tenth less than the previous month and its lowest level in the entire historical series.

On the other hand, the ECB’s survey of bank loans revealed this week that banks in the euro area substantially tightened their lending conditions in the first quarter, even beyond the expectations of the entities themselves, as a result of greater risk perception in a context marked by rising interest rates and financial turmoil.

NEXT DECISIONS.

“Future Governing Council decisions will ensure that policy rates are tightened enough to achieve a timely return of inflation to the 2% medium-term target and will remain at those levels for as long as necessary.” , the entity has assured, which will continue to maintain a data-dependent approach to determine the appropriate level and duration of the restriction.

In this sense, the Governing Council has expressed its willingness to adjust all its instruments within its mandate to ensure that inflation returns to its 2% target in the medium term and to preserve the proper functioning of the transmission of monetary policy. .

The ECB’s decision to moderate the intensity of its rate hikes comes just one day after the Federal Open Market Committee (FOMC) of the United States Federal Reserve (Fed) decided to raise the rate interest rate at 25 basis points, up to a target range of between 5% and 5.25%, also leaving open the possibility of a pause in the upward path of US monetary policy after the ten consecutive hikes that have set the price of money in the US at 16-year highs.

On his side, with the quarter-point increase announced this Thursday by the ECB and after the increases of 50 basis points in March and February 2023 and also in December 2022, as well as the two increases of 75 basis points undertaken In the October and September meetings of last year, which followed the initial rise of half a percentage point in July 2022, the ECB has raised the price of money by 375 basis points during the current cycle of increases.

IT WILL STOP REINVESTING MATURITIES IN JULY.

On the other hand, along with the rise in interest rates, the ECB announced this Thursday that it plans to interrupt reinvestments of debt maturities acquired under the APP program as of July 2023.

Regarding the Pandemic Emergency Purchase Program (PEPP), the Governing Council intends to reinvest principal payments on securities purchased under the program that mature until at least the end of 2024.

In this sense, it has assured that it will continue to make reinvestment of overdue repayments more flexible in the PEPP portfolio, in order to counteract the risks of the monetary policy transmission mechanism related to the pandemic.