Published on Monday, December 19, 2022

Europe | The 50s Club

Following a series of more aggressive 75 bp hikes at previous meetings, last week the ECB raised interest rates by just 50 bp, following in the footsteps the Federal Reserve and the Bank of England. In doing so, it is trying to strike the right balance, which is always difficult in times of stagflation as the current one.

Key points

  • Key points:
  • In the case of the ECB, the 50 bp rate hike had been anticipated before the meeting (although some still reckoned it would be 75 bp), and takes the rate to 2.50% for the refinancing and 2% for the deposit rate. Aside from this slowdown, the central bank has made it clear that there will be no relaxation in the fight against inflation.
  • Its statement indicates that there are still significant hikes to come, which from now on will be 50 basis points (implying that there will be several hikes) and the outlook for both growth and inflation confirms that the central bank is less concerned about growth than it is about inflation.
  • On the growth side, they continue to predict a recession, albeit a shallow and relatively short-lived one, thanks to various support factors. Even so, the ECB has lowered its growth forecast for 2023 from 0.9% in September to 0.5% now. However, looking further ahead to 2024 and 2025, it predicts relatively robust figures of 1.9% and 1.8%.
  • On the inflation front, the upward revision has been significant, and while consistent with the strong and unwelcome increase in October, November’s figure surprised many in the opposite direction. Perhaps the ECB is trying to convey, with its forecasts of 6.3% and 3.4% for 2023–24, that the situation is not fully under control, thus justifying its message of further hikes in the near future.
  • The ECB has announced that it will start reducing its balance sheet in March, at an initial pace of 15 billion euros per month over the first four months, and then decide how best to proceed. While these timeframes and figures were largely expected, they are on the hawkish side.

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