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Despite a new interest rate hike by the ECB, markets climbed 3.1% with hopes that an end to rate increases is in sight.
The European Central Bank (ECB) recently increased rates by 50 basis points and pledged a further interest rate hike by March. On Thursday, the Euro system’s governing bank announced this development, which takes its key rate to 2.5%.
In addition, the ECB remains determined to “stay the course in raising interest rates significantly at a steady pace.” According to the bank, keeping rates at restrictive levels would control price increases by suppressing demand. Furthermore, the ECB also suggested that data would play a key role in shaping decisions at future meetings.
The latest ECB interest rate hike follows four hikes last year which pulled eurozone rates out of the red for the first time since 2014.
Markets climbed 3.1% on the heels of the first ECB rate increase of 2023. Most likely anticipating an imminent end to the hikes. Meanwhile, according to flash figures published Wednesday, eurozone inflation dipped for the third consecutive month in January. However, headline inflation remained high at 8.5%, with core inflation (minus energy and food) flat at 5.2%.
ECB President Touches on Arising Developments from Latest Interest Rate Hike
Following the hike announcement, ECB President Christine Lagarde explained at a news conference that price pressures remain strong. The reason is partly that high energy costs are spreading throughout the economy, Lagarde added. In addition, the ECB leader also said that the current economic clime calls for harmonization of fiscal and monetary policies.
Lagarde pointed out a 0.1% fourth-quarter growth slowdown in the euro zone’s economic picture, which she expects to remain weak near-term. According to the ECB president, continued geopolitical uncertainty and steeper financing conditions would impact growth. Nonetheless, Lagarde noted that economic growth outlook risks “have become more balanced.” She cited specific macroeconomic examples such as more secure gas supplies, easing supply pressures, and growing consumer confidence. Additionally, Lagarde also pointed to rising wages and lower energy costs as further proof of a more balanced economic tapestry.
Despite any near-term glitches, Lagarde concluded that “the economy has proved more resilient than expected and should improve over the coming quarters.” However, the ECB president offered some advice to the governments of developed nations regarding how they tackle energy costs. According to her, governments should roll back support on said energy costs to avoid inadvertently increasing medium-term inflationary pressures.
Last December, the ECB announced its intent to start reducing its 5 trillion-euro ($5.49 trillion) balance sheet from March. According to the eurozone bank, such reductions would occur by an average of 15 billion euros per month until the end of June 2023.
Over the last decade, the ECB has pumped billions into the euro economy in the form of bond purchases. These fiscal efforts tried to stimulate growth during various crises, most notably the coronavirus pandemic.
Besides rate hikes, the ECB resorted to reducing its balance sheet and selling off its bond portfolio to further tighten policy.