All as expected. The European Central Bank has announced an interest rate hike of 25 basis points. The reference rate thus rose to 4%, that on bank deposits with the ECB to 3,25% and that on marginal loans to 4,25%.
As for the near future, ECB president Christine Lagarde leaves no room for doubt: the hikes will continue: “Have we finished the journey? No, we are not at our destination. Do we have other way to go? Yes »she said at the press conference, confirming that:“ Barring radical changes in our basic forecast, we will continue to raise rates at the next meeting, we are not thinking of a break ”. In other words, at least for the moment, the ECB has no intention of imitating the Fed, which last night decided to take a break from hikes, leaving interest rates unchanged for the first time in 15 months.
“I don't want to comment on what the terminal level of rates might be. We will know what the terminal rate will be when we get there ”, added the number one of the Eurotower when answering questions from journalists.
Inflation projections
"The economic outlook remains highly uncertain" as a result of the war between Russia and Ukraine and rising geopolitical tensions, Lagarde said.
According to the Governing Council of the ECB, “inflation has fallen but it is estimated that it will remain too high too long”. Speaking in percentage terms, according to the latest screenings, average inflation will be 5,4% at the end of the year and then fall to 5,4% in 2024 and 2,2% in 2025. Strong pressures on core inflation are also expected. Inflation excluding energy and food should therefore be equal to an average of 5,1% at the end of the year (it was 4,6% in March) to 3% (from 2,5%) in 2024 and 2,3% (from 2,2 .2025%) in XNUMX, thus remaining above headline inflation for most of the monetary policy horizon.
“Indicators of underlying price pressures remain elevated, although some of them show tentative signs of abating,” reiterated the ECB president Christine Lagarde at a press conference in Frankfurt. “We are ready to adjust all tools within our mandate to ensure that inflation returns to our medium-term target and to preserve the smooth functioning of the monetary policy transmission mechanism,” he added.
Growth projections
Resize them growth projections: the GDP of the euro area will grow by 0,9% (from 1%) in 2023, by 1,5% (from 1,6%) in 2024 and by 1,6% in 2025. “The growth could also be slower if the effects of monetary policy were stronger than expected. The renewed tensions on the financial markets could lead to even more restrictive financing conditions than expected and weaken confidence. Furthermore, weaker growth in the global economy could further dampen economic activity in the euro area. However, growth could be higher than forecasts if the strong labor market and the easing of uncertainty translate into higher confidence and spending by businesses and individuals”, warned the head of Eurotower.
Lagarde: "The increases are being transmitted to the real economy"
Lagarde also underlined that “the past increases in interest rates decided by the Governing Council are taking place forcefully conveying the terms of financing and are gradually affecting the whole economy” and that “borrowing costs have risen sharply and loan growth is declining”. The more restrictive financing conditions "They are a key reason why inflation should decline further towards target, as they are expected to increasingly dampen demand."
As per tradition, the board of the ECB reiterated that future decisions will be based on the data and "on its assessment of the inflation outlook considering the most recent economic and financial data, the dynamics of underlying inflation and the intensity of the transmission of the monetary policy".
The Paa and Pepp purchasing programs
The ECB has confirmed it stop from July to reinventions of maturing portfolio securities.
Sul asset purchase program (PAA), Frankfurt announced that the portfolio is shrinking at a measured and predictable pace, given that the Eurosystem reinvests only part of the principal repaid on maturing securities. The pace of this reduction will average €15 billion per month until the end of June 2023. From July, however, reinvestments will end.
For the PEPP (pandemic emergency purchase programme), on the other hand, the Governing Council intends to reinvest the principal repayments on maturing securities under the program at least until the end of 2024.
The market reaction
No sudden reactions to the novelties arrived in Frankfurt, widely awaited by the markets, with the Stock Exchanges that slightly widen the declines, continuing on the path of weakness. After the new rate hike and the announcement of further increases in the near future, Business Square yields 0,6%, as well as Frankfurt. It gets worse Paris (-0,9%), while Madrid yields 0,2%.
In Milan, the banks with are traveling in positive territory FinecoBank (+ 1,2%) and Ps (+0,9%) to lead the way.
On the currency market, it regains altitude the euro which climbs back above the $1,08 threshold. Also noteworthy is the sharp increase in gas price (+7,8% to 41,3 euros per mWh), due to the drop in supplies from Norway which has been occurring since the beginning of June due to leaks and maintenance on many installations.
