What happens after the fourth increase in a row

The ECB is tightening the reins

How things will play out after the fourth consecutive rate hike

ECB President Christine Lagarde.

The European Central Bank is pushing for a change in interest rates. The fourth consecutive interest rate move is less strong than the previous two, but monetary watchers are expecting more. Also, something is going on with the massive bond buying program.

Berlin/Frankfurt. The European Central Bank (ECB) is once again tightening the reins of monetary policy. At the meeting held on Thursday, the Governing Council of the ECB decided to increase the base interest rates for the fourth time in a row. The interest rate at which commercial banks can refinance themselves with the ECB rose by 0.5 points to 2.5 percent.

ECB President Lagarde has declared war on persistent inflation

The ECB has already raised interest rates three times in just a few months to combat the persistent spike in inflation.

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As the inflation outlook remains high, The Governing Council of the ECB believes that further increases in interest rates will be necessary in the coming years. “In particular, the Governing Council is of the view that interest rates still need to rise significantly and steadily to reach sufficiently restrictive levels to ensure a timely return of inflation to the 2% medium-term objective,” the central bank said. With.

Stocks of bonds will decrease

At the same time, the committee decided to reduce the huge stocks of bonds that national central banks have bought on behalf of the ECB in recent years. Since 2015, the ECB has invested a total of 3.4 trillion euros in government and corporate bonds.

The ECB has not invested new money in the bond market since the summer of this year. However, the proceeds from expiring bonds under the general purchase program APP have so far been fully channeled into new securities. From March 2023, the volume of reinvestment must be reduced at a “moderate and predictable pace”, the report says. The Governing Council of the ECB intends to announce the precise parameters for reducing APP’s holdings at its February meeting. The aim is to reduce the total bond portfolio by an average of 15 billion per month.

The ECB reaffirmed its objective of achieving stable prices in the euro area in the medium term, with inflation reaching two percent. For the guardians of money, that is still a long way off – in October and November, inflation in the euro zone reached a double-digit limit compared to last year. “We are not giving up. We have a long way to go,” ECB President Christine Lagarde said in Frankfurt.

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The ECB has belatedly recognized the danger

Lagarde and much of the ECB’s leadership have long interpreted high inflation as temporary, so they initiated rate changes only later than, for example, the US Federal Reserve Bank. The US Federal Reserve raised interest rates by 0.5 percentage points on Wednesday. So the Fed took a slightly more dovish course, but signaled further steps. Interest rates in the US now range from 4.25 to 4.50 percent.