Lagarde – ECB: A 5th, significant increase in interest rates is coming

The head of the European Central Bank announced today the further significant increase in interest rates, after their fourth consecutive increase of 0.5%.

As the head of the ECB stated after the meeting of the Governing Council, during which it was decided, in addition to the interest rate increase, the gradual reduction of the bond portfolio “interest rates will have to increase further significantly at a steady pace, in order to be formed in a level which will ensure the return of inflation to 2%”.

The revised forecasts published by the ECB today almost confirm the “adverse macroeconomic scenario” that the Central Bank had published in September. Now, according to the ECB’s main scenario, inflation will reach 8.4% this year before falling to 6.3% in 2023 and 3.4% in 2024, from the 2.3% it predicted last September. Inflation is now forecast to drop to 2.3% in 2025!

As far as the growth front is concerned, the ECB predicts for this year GDP growth of 3.4% (from 3.1%), but in 2023 GDP growth will decline to 0.5% from 0.9% predicted by September, and in 2024 growth will reach 1.9% (as forecast in September) and will be 1.8% in 2025. The global economy, according to the head of the ECB, is also slowing down in a context of continued geopolitical uncertainty , especially because of Russia’s unjustified war against Ukraine. Still, he said, it was positive that employment rose 0.3 percent in the third quarter and unemployment hit a new record low of 6.5 percent in October. In addition, the increase in wages is going to restore some lost purchasing power, thus strengthening consumption.

Today’s rate increase of 0.5%, which constitutes a slight slowdown in their rate of rise, is due, according to all analysts, to the first positive signs appearing in the de-escalation of inflation, although as reflected in the revised forecasts, the de-escalation it will require at least one more year.

The ECB has also decided to start gradually reducing the size of its Assets, limiting the amount of bonds it will reinvest relative to those maturing. It is recalled that through the various quantitative easing programs that the ECB has implemented in recent years, as well as the pandemic program (the well-known PEPP) in which Greek bonds also participated, it has gathered in its portfolio bonds with a nominal value of approximately 5 trillion euros. As Christine Lagarde announced today, at the February meeting the Governing Council will announce the detailed parameters for the reduction of the portfolio it has “built” under the APP program.

However, the ECB board is to continue reinvesting, in full, the funds from the maturity of the bonds maturing under the APP until the end of February 2023. After that, the APP portfolio will be reduced at a certain rate. The reduction will amount to €15 billion per month on average by the end of the second quarter of 2023, and its subsequent pace will be determined over time.

Regarding the PEPP program through which the ECB has purchased Greek government bonds amounting to 39.6 billion euros, the Board of Directors intends to continue the reinvestment, in full, of the funds from the repayment of bonds that expire at least until the end of 2024.

RES-EMP

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