At the highest magnification interest rates since January 1999 and the “birth” of the euro took place European Central Bankin a historic and unanimous decision to reduce inflationdespite the recession Eurozone now more and more likely due to Russian gas “games” and threats. At the same time, he promised to continue raising the interest rate and move forward in the next meetings.

The Governing Council decided to increase the ECB’s three key interest rates by 75 basis points, bringing the deposit rate to 0.75%, the main refinancing rate to 1.25% – the highest level since 2011 – and interest rates on the margin credit line to 1. fifty%. .

According to the ECB, “at its next meetings, the Governing Council expects further interest rate hikes to moderate demand and prevent the risk of a sustained rise in inflation expectations,” explaining that inflation is still excessively high and likely to remain above the target ( 2%) over a long period of time.

During the press conference, ECB President Christine Lagarde also noted that interest rates are not yet at “neutral” levels, while stressing that the increase will continue in the next two, three or four meetings, adding that the board will regularly review the monetary policy based on incoming inflation data and forecasts.

Inflation has risen

The move came after weeks of repeated political statements, most of which supported a 75 basis point hike. The big increase also came after the ECB revised its own forecasts upwards. According to its new forecasts, inflation is now expected to average 8.1% in 2022 (up from 6.8% in the June forecast), to 5.5% in 2023 (from 3.5% earlier) and to 2.3% in 2024 (from 2.1%).

rising down

In the event of a complete cessation of Russian gas supplies, the eurozone will record a decline of 0.9% in 2023, the ECB estimates under an unfavorable scenario.

The ECB has also cut its growth estimates significantly for the remainder of this year and for all of 2023. As he pointed out, after recovering in the first half of 2022, recent data suggest that economic growth in the euro area is slowing significantly and the economy is expected to stagnate at the end of this year and in the first quarter of 2023.

The unfavorable geopolitical situation, especially unprovoked Russian aggression against Ukraine, has a negative impact on business and consumer confidence. So the economy is now expected to grow at a pace of 3.1% in 2022 (from 2.8%) due to a stronger first half, but will move to 0.9% in 2023 (from 2.1% ) and in 2024 to 1.9% (from 2.1%). 2.1%).

However, under the unfavorable scenario of the ECB, which provides for a complete cessation of Russian natural gas supplies, it is expected that in 2023 the Eurozone will experience a recession at the level of 0.9%, and inflation will rise to 6.9%.

The ECB didn’t have many options, analysts said. Anything short of a significant change in interest rates would mean that the ECB was not taking its inflation-fighting mandate “seriously”. This threatened to increase the already high long-term inflation expectations, which would mean a loss of confidence in the ECB.

Predictions

Pimco estimates that the ECB will raise interest rates by 50 basis points at each meeting in October and December. “We believe that the ECB will be looking to move its interest rates into neutral territory very quickly, and in 2023 it will reduce the amount of the increase to 25 basis points,” said house fund manager Konstantin Veit. Citigroup, for its part, believes the ECB will launch another “bold” interest rate hike of 75 bps in October, followed by a 50 bps hike. in December, before the weakening economy halted the rate hike cycle at 2%.

“With this decision, it is now clear that the ECB has moved away from inflation targeting and forecasting and has joined a group of central banks focused on lowering inflation,” said Carsten Brzeski, chief economist at ING. “However, we still do not see how monetary policy can reduce inflation, which is mainly related to (external) factors on the supply side,” he emphasizes.

At the same time, the ECB announced that it would begin to “compensate” government deposits in national central banks in an attempt to prevent the risk of these amounts returning to an already fairly liquid market. Thus, from now until April 2023, the cash reserves of the eurozone states in the national central banks will receive, as compensation, the ECB’s deposit rate increased to 0.75%. This will help support the market in REPO transactions (REPOs) where cash is exchanged for bonds. This market has been undermined by the ECB’s own massive debt purchases, making it difficult to find safe government bonds when there is an excess of cash.