The ECB raises rates 0.5 points and anticipates another equal rise for March

It will skew reinvestments from its corporate debt program towards issuers with better climate behavior

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The Governing Council of the European Central Bank (ECB) has decided to raise interest rates by 50 basis points, so that the interest rate for its refinancing operations will stand at 3%, while the deposit rate will reach 2.50% and the loan facility 3.25%.

Likewise, it has advanced that, in view of the pressures on underlying inflation, “it plans to increase interest rates another 50 basis points at its next monetary policy meeting in March”, then raising the reference rate to 3.50%, to later evaluate the future path of its monetary policy.

“The Governing Council will continue the course of significant increases at a sustained pace in interest rates and will keep them at sufficiently restrictive levels to ensure the timely return of inflation to its objective of 2% in the medium term”, the institution has assured in a statement.

In this regard, it has argued that keeping interest rates at restrictive levels will reduce inflation over time by moderating demand, and will also serve as protection against the risk of a persistent upward shift in inflation expectations.

In any case, he stressed that the future decisions of the Governing Council on official interest rates will continue to depend on the data and follow an approach in which the decisions will be adopted at each meeting.

With this fifth consecutive rise in the price of money, which reached its highest level at the end of 2008, the ECB shows no signs of relaxing its monetary policy normalization, after raising another 50 basis points in December and the two increases of 75 basis points undertaken at the October and September meetings, after an initial rise of half a percentage point in July 2022.

The ECB’s decision comes one day after learning that the year-on-year inflation rate in the euro area moderated in January for the third consecutive month, relaxing to 8.5%, seven tenths below the 9.2% in December and at its level lowest since May 2022, before the central bank started raising rates.

Likewise, the Federal Open Market Committee (FOMC) of the United States Federal Reserve (Fed) decided yesterday to raise interest rates by 25 basis points, until placing them in a target range between 4.50% and 4.75%.

In the subsequent press conference, Fed Chairman Jerome Powell indicated that it will be necessary to continue raising rates to contain inflation, although he limited the US central bank’s road map to “a couple of more hikes.”

BALANCE REDUCTION.

On the other hand, the Governing Council of the ECB has confirmed that in March it will begin to reduce its debt portfolio acquired under the APP program by an average of 15,000 million euros per month, a rate that it will maintain until the end of June 2023, to be determined later. the rate of reduction required.

In this sense, it has specified that partial reinvestments will be carried out in accordance, in general terms, with current practice.

In particular, the remaining reinvestments will be allocated in proportion to the amortization quota of each of the programs that make up the APP and, in the case of the public securities purchase program (PSPP), to the amortization quota corresponding to each jurisdiction. and to each national and supranational issuer.

For purchases of Eurosystem corporate bonds, the remaining reinvestments “will be more heavily oriented towards the best climate-performing issuers.”

Without prejudice to the ECB’s price stability objective, this approach will support the gradual decarbonization of Eurosystem corporate bond holdings in line with the objectives of the Paris Agreement, the institution has pointed out.

As regards the PEPP, the emergency program launched during the pandemic, the Governing Council plans to reinvest the principal of the securities acquired under the program that mature until at least the end of 2024.

In any case, the future extinction of the PEPP portfolio will be managed in such a way as to avoid interference with the appropriate orientation of monetary policy.

Thus, the Governing Council will continue to be flexible in reinvesting the principal of maturing PEPP portfolio securities, with the aim of countering pandemic-related risks to the monetary policy transmission mechanism.