The European Central Bank raises interest rates, and expects large increases in the future as it announces a plan to shrink the balance sheet

European Central Bank President Christine Lagarde attends a hearing of the European Parliament’s Economic and Monetary Affairs Committee on November 28, 2022 in Brussels, Belgium.

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The European Central Bank opted for a smaller rate hike at its meeting on Thursday, raising its key rate from 1.5% to 2%.

It also said that from the beginning of March 2023 it will start reducing its balance sheet by 15 billion euros ($16 billion) per month on average until the end of the second quarter of 2023.

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It said it would announce more details about the curtailment of its asset purchase program (APP) holdings in February, and that it would regularly reassess the pace of decline to ensure it was in line with its monetary policy strategy.

The widely expected 50 basis point interest rate increase is the central bank’s fourth increase this year.

He. She It rose by 75 basis points in October September and by 50 basis points in July, leaving rates out of negative territory for the first time since 2014.

“The Governing Council decides that interest rates will still have to rise significantly at a steady pace to reach levels sufficiently restrained to ensure a timely return of inflation to the 2% target over the medium term,” the ECB said in a statement.

In a press conference following the announcement, ECB President Christine Lagarde said: “Anyone who thinks this is the pivot of the ECB is wrong. We are not pivoting, we are not hesitating, we are showing determination and flexibility to continue the journey where we have…if what Compared to the Federal Reserve, we have more ground to cover. We have more time to go.”

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“We’re not slowing down. We’re in for the long game.”

The central bank said it is working on eurozone inflation expectations that have been “significantly upward revised”, and expects inflation to remain above its 2% target through 2025.

It now expects inflation to average 8.4% in 2022, 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025.

However, she sees the recession in the region as “relatively short-lived and shallow.”

This comes after the latest inflation data for the eurozone showed a slight slowdown in inflation The price goes up in novemberalthough the rate is still at 10% per annum.

Lagarde told CNBC’s Annette Weisbach: “One of the key messages, in addition to the hike, is to signal that we’re not going to raise rates any more, which we’ve said before, but today we’ve decided that interest rates will still need to go up significantly, in a stable place.”

“It’s pretty clear that based on the data we have at the moment, a significant run-up at a steady pace means we have to raise rates by an average of 50 basis points for a while,” she said.

Regarding the announcement of quantitative tightening, she said that the ECB wants to follow predictable and measured principles.

Its decision to make an average of €15 billion in cuts in the APP over four months represents about half of the redemptions over that time period, and was based on advice from the market team and all central banks and other officials involved in decision-making.

“It seems to be an appropriate number in order to normalize our balance sheet, bearing in mind that the main instrument is the interest rate,” she said.

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The euro rose from a 0.5% loss against the dollar to 0.4% following the announcement, but European stocks in the Stoxx 600 fell 2.4%.

The US Federal Reserve on Wednesday Its main price has increased By 0.5 percentage points, he did Bank of England And the Swiss National Bank Thursday morning.

“Unlike the BoE, this is a hawkish rally, given the language that is used [quantitative tightening] and a final start date,” said analysts at BMO Capital Markets.

However, they noted that the ECB was lagging other central banks in cutting its balance sheet and that reinvestment under the pandemic emergency purchase program would continue.

“The language in the statement is pragmatic, and the Bank leaves the QT path open,” they wrote in a note.

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