ECB Slows Down But Hints at Major Rate Hikes Ahead to Shrink Balance Sheet

UTC by Bhushan Akolkar · 3 min read
ECB Slows Down But Hints at Major Rate Hikes Ahead to Shrink Balance Sheet
Photo: World Economic Forum / Flickr

ECB President Christine Lagarde said that they would conduct significant rate hikes in the coming months and there’s no decision on pivoting anytime soon.

On Thursday, December 15, a day after the Federal Reserve announced a 50 basis points rate hike, the European Central Bank (ECB) also announced a smaller rate hike taking interest rates from 1.5% to 2%.

The ECB Reveals New Rate Hike

However, the bank has said that it would rate hikes “significantly” in the future to tame inflation and shrink its balance sheet. Starting March 2023, ECB plans to reduce its balance sheet by 15 billion euros ($15.9 billion) per month on average. This would further continue until the end of the second quarter of 2023.

In February, ECB will reveal more details on the reduction of the asset purchase program (APP). In the meanwhile, it will continue to reassess its position to stay on track with its monetary policy strategy. Earlier this year in July, the ECB raised interest rates by 50 basis points.

Later in September and October, it raised by 75 basis points each getting interest rates out of the negative territory for the first time in eight years. In a statement on Thursday, the ECB noted:

“The Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target”.

ECB Won’t Pivot Soon

There’s been an uproar in the global financial markets and it’s only a matter of time before the ECB decides to pivot. However, ECB President Christine Lagarde has made her intentions clear adding that they won’t pivot anytime soon.

“Anybody who thinks this is a pivot for the ECB is wrong. We’re not pivoting, we’re not wavering, we are showing determination and resilience in continuing a journey where we have. … If you compare with the Fed, we have more ground to cover. We have longer to go. We’re not slowing down. We’re in for the long game,” she said.

The central bank said that it expects the Eurozone inflation to stay above 2% up to 2025. It sees that average inflation to drop to 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025.

Market analysts believe that the hawkish stand by the Fed could lead to a major recession in the coming times. But the ECB believes that it would be “relatively short-lived and shallow”. Speaking on the decision relating to quantitative tightening, Lagarde said that the ECB wants to follow the principles of being predictable and measured.

The central bank is looking to reduce its balance sheet over the next year. Lagarde said that this decision comes on advice from its market team, all central banks, and other officials involved. “It seemed an appropriate number in order to normalize our balance sheet, bearing in mind that the key tool is the interest rate,” she added.

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Bhushan Akolkar

Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.

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