Euro area monetary policy, October 2022

At its October 27 meeting, the European Central Bank (ECB) raised its core refinancing operations, margin line and deposit line rate by 75 basis points to 2.00%, 2.25% and 1.50% respectively. The increase, which is in line with market expectations, pushes rates to their highest level since 2009. In addition, the Bank announced that it would tighten the terms of the third series of ultra-cheap loans to commercial banks – aimed at a longer period. refinancing operations (TLTRO), the amount of which exceeds 2 trillion euros, to strengthen the transmission mechanism. Finally, he also cut the minimum reserve interest rate by 50 basis points, bringing it in line with the ECB’s deposit rate.

The decision to continue aggressively raising rates was prompted by rising inflation, despite the slowdown in economic activity and rising recession risks. Inflationary pressures continue to mount as the impact of the Russian invasion of Ukraine affects trade and supply chains, pushing up energy and commodity prices. In addition, price increases have widened as the post-pandemic demand recovery, supply constraints and higher energy and production costs are reflected in core consumer prices.

The Bank’s management pointed to further tightening, although they replaced the previous reference to an increase continuing for “several meetings” with a further increase in borrowing costs, suggesting a more lenient pace of tightening. The bank said additional hikes would be “data dependent and follow a meeting-by-meeting approach,” meaning that the timing and size of such hikes will depend on price developments and inflation forecasts.

Commenting on the ECB’s decision, Karsten Brzeski, Head of Global Macroeconomics at ING, said:

“The press conference following the announcement of the interest rate hike showed that the European Central Bank (ECB) is determined to keep raising interest rates. However, while today’s giant trek was a simple affair, we expect much more contentious discussions in December and the completion of the trek cycle next February.”

The next monetary policy meeting is scheduled for December 15.

FocusEconomics Consensus Forecast experts are still assessing the latest developments.