The European Central Bank (ECB) has once again raised interest rates by 50 basis points on the promise that it will stay the course in raising rates significantly at a steady pace.
In making the announcement, the ECB also promised that it will keep interest rates at levels that are sufficiently restrictive to ensure a timely return of inflation to its two per cent medium-term target. The ECB Governing Council decided on Thursday (February 2) to raise the three key interest rates by 50 basis points.
In view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.00 per cent, 3.25 per cent and 2.50 per cent respectively, with effect from February 8, 2023.
In a statement on the matter, the ECB Governing Council said, “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. “
Reducing Eurosystem’s APP
The Governing Council’s has emphasized that future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach. The Governing Council also decided on the modalities for reducing the Eurosystem’s holdings of securities under the asset purchase programme (APP).
As communicated in December, the ECB said the APP portfolio will decline by €15 billion per month on average from the beginning of March until the end of June 2023 and the subsequent pace of portfolio reduction will be determined over time. Partial reinvestments will be conducted broadly in line with current practice.
In particular, the remaining reinvestment amounts will be allocated proportionally to the share of redemptions across each constituent programme of the APP and under the public sector purchase programme (PSPP) to the share of redemptions of each jurisdiction and across national and supranational issuers. For the Eurosystem’s corporate bond purchases, the remaining reinvestments will be tilted more strongly towards issuers with a better climate performance.
Without prejudice to the ECB’s price stability objective, this approach will support the gradual decarbonisation of the Eurosystem’s corporate bond holdings, in line with the goals of the Paris Agreement.