The ECB meets expectations at its March meeting by raising interest rates 50 basis points to 3.5%

He European Central Bank (ECB) did not surprise the markets at its March meeting and announced an interest rate rise of 50 basis points up to 3.5%. This is the highest level reached by the rate since October 2008.

ECB Monetary Policy Statement

The Governing Council decided to raise the three key ECB interest rates by 50 basis points. Consequently, the interest rate of the main financing operations, the interest rates of the marginal credit facility and the deposit facility will increase to the 3.50%, 3.75% and 3.00% respectively, with effect from March 22, 2023.

It is projected that the inflation will stay too high for too long. For this reason, the Governing Council decided today to increase the three official ECB interest rates by 50 basis points, in line with its determination to ensure the timely return of inflation to the medium-term target of 2%. The high level of uncertainty reinforces the importance of a data-driven approach to interest rate decisions Governing Council officials, which will be determined by its assessment of the inflation outlook in the light of incoming economic and financial data, core inflation dynamics, and the strength of monetary policy transmission.

The Governing Council is closely monitoring current market tensions and stands ready to respond as necessary to preserve price stability and financial stability in the euro area. He euro area banking sector is resilient, with strong capital and liquidity positions. In any case, the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve smooth monetary policy transmission.

The new macroeconomic projections of the ECB staff were finalized in early March before the recent appearance of tensions in the financial markets. As such, these tensions imply additional uncertainty around the baseline assessments of inflation and growth. Prior to these latest events, the baseline path for headline inflation had already been revised downwards, mainly due to a smaller than previously expected contribution from energy prices. The staff of the ECB now forecasts average inflation of 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. At the same time, underlying price pressures remain strong. Inflation excluding energy and food continued to rise in February and ECB experts expect it to average 4.6% in 2023, higher than forecast in the December projections. Subsequently, it is forecast to fall to 2.5% in 2024 and 2.2% in 2025, as upward pressures from previous supply shocks fade and the economy reopens, and as tightening monetary policy increasingly dampens demand.

The baseline projections for growth in 2023 have been revised upwards to an average of 1.0% as a result of both the fall in energy prices and the greater resilience of the economy in the face of the challenging international environment. Next, ECB staff expect growth to pick up further, as 1.6%, both in 2024 and 2025, supported by a strong labor market, improving confidence and a recovery in real income. At the same time, the growth rebound in 2024 and 2025 is weaker than forecast in December, due to the tightening of monetary policy.

Asset Purchase Program (APP) and Pandemic Emergency Purchase Program (PEPP)

The size of the PPP portfolio is declining at a measured and predictable pace, as the Eurosystem is not fully reinvesting the principal of maturing securities. The decrease will be, on average, 15,000 million euros per month until the end of June 2023 and its subsequent rhythm will be determined later.

As regards the PEPP, 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 so as to avoid interference with the proper orientation of monetary policy.

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

financing operations

As credit institutions repay the amounts obtained in the framework of targeted longer-term refinancing operations, the Governing Council will regularly assess how these operations are contributing to the stance of its monetary policy.

The Governing Council stands ready to adjust all its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission. The ECB has all the necessary monetary policy instruments to provide liquidity support to the euro area financial system if necessary. In addition, the Transmission Protection Instrument is available to counter unjustified and disorderly market dynamics that constitute a serious threat to the transmission of monetary policy in euro area countries, allowing the Governing Council to comply with its price stability mandate more effectively.