On the evening of October 27, Beijing time, ECB held a interest rate meeting, following the footsteps of Feder , and announced that it would raise all three major interest rates by 75 basis points, in line with market expectations.
This is the second time in a row that the European Central Bank has raised 375 basis points. After the interest rate hike, the European Central Bank's marginal loan interest rate was 2.25%, the main refinancing rate was 2%, and the deposit convenience rate was 1.5%.
ECB said it expects further rate hikes. In September, the inflation rate in euro area reached 9.9%. In recent months, soaring energy and food prices, supply bottlenecks, and a recovery in demand after the pandemic have led to an increase in price pressure and an intensified inflation in . The ECB's monetary policy aims to reduce support for demand and prevent the risk of inflation expectations continuing to move upward.
After the European Central Bank resolution was announced, the euro fell in the short term, the euro fell below 1.00 against the US dollar, and fell by more than 0.80% during the day.
stock market response was relatively flat. As of press time, most major European stock indexes rose slightly.
rate hikes to cope with inflation
5 In July, the European Central Bank announced its first rate hike in 11 years, bid farewell to the 8-year negative interest rate era, and raised another 75 basis points in September. In the past three months, the ECB has raised a total of 200 basis points, making it the most radical rate hike cycle in history .
In addition, at this interest rate meeting, the ECB announced that it would change the terms and conditions of the fixed long-term refinancing operation (TLTRO) III and provide additional voluntary repayment dates for banks. The specific adjustment will begin on November 23, and the interest rate for the targeted long-term refinancing operation III operation will be linked to the ECB's average applicable key interest rates during this period.
ECB has been lending to euro zone commercial banks at ultra-low interest rates through targeted long-term refinancing operations to stimulate the economy. In today's environment of rising money market interest rates, TLTRO not only creates unfair competitive advantages for euro zone banks, but also does not help the ECB further absorb market liquidity.
The ECB said that during the severe period of the epidemic, long-term targeted refinancing operations have played a key role in coping with the downside risks of stable prices. But given the rapid rise in inflation, tools need to be recalibrated to ensure they are consistent with the broader process of monetary policy normalization and to strengthen the transmission of policy interest rate hikes to bank lending conditions.
It is worth noting that before this interest rate meeting, the market discussions that the ECB may release specific details of quantitative tightening, but the ECB did not mention it in its official statement.
Since 2015, the European Central Bank has injected liquidity into the market through the Asset Purchase Programme to stimulate the weak euro zone economy. After the outbreak of the new crown epidemic, the European Central Bank launched a pandemic emergency asset purchase program (PEPP: Pandemic Emergency Purchase Programme). At present, the ECB's balance sheet has risen to 9 trillion euros, equivalent to 67.8% of the euro zone GDP.
ECB Governor Lagarde pointed out at a press conference that discussions on asset purchase plans will continue and key principles will be decided on December 15.
Frederik Ducrozet, head of macroeconomic research at Swiss Pataca Wealth Management, told the International Financial News reporter that once policy interest rates are normalized, the European Central Bank may confirm that quantitative tightening (QT) will begin in 2023. Importantly, QT will be a passive, gradual process.
In addition, Lagarde pointed out at a press conference that the ECB has made substantial progress in abolishing easing policies, but the weakening of the euro has exacerbated price pressure. The currency normalization has not been completed yet, and the scale of future interest rate hikes will depend on the data.
Currently, European inflation is still high. According to data from the European Statistics Office on October 19, the year-on-year final value of the euro zone's September consumer price index (CPI) continued to climb from 9.1% in August to 9.9%, lower than the initial value announced in early October 10%, but it is still the highest in history; the euro zone inflation rose by 1.2% in September, the largest increase since March 2022. The inflation rate of the EU 27 member states reached 10.9%. core CPI, which excludes energy and unprocessed food in September, rose 6% year-on-year.
Compared with August, the inflation rate of six EU member states fell, one member state remained stable, and the remaining 20 member states all showed an increase. France, which has the lowest inflation level in the euro zone, also had a inflation level of 6.2% in September.
htmlIn September, energy projects contributed the most to the euro zone's annual inflation rate, pulling up the inflation rate by 4.19 percentage points, followed by food, alcohol and tobacco. In the same period last year, the euro zone inflation rate was only 3.4%. With the end of the Ukrainian crisis still far away, most market participants believe that the cost of living in the euro zone will deteriorate or significantly worsen.International Monetary Fund (IMF) believes that how long the euro zone inflation will last will depend on the duration of labor market tensions and supply chain bottlenecks, the ECB's response and the Ukrainian crisis and its duration of its impact.
Recession risk increased
5 In September, the ECB predicted that the region's economic growth rate in 2023 will slow to 0.9% from 3.1% this year. Lagarde warned at the time that the risk of a recession would rise this winter.
At this press conference, Lagarde said that economic activity may slow down more significantly in the third quarter of this year and may deepen in the fourth quarter and next year's first quarter. High inflation has suppressed consumption and production, and the disruption in natural gas supply has exacerbated economic headwinds.
According to the IMF's October update forecast, the euro zone economic growth rate is expected to be 3.1% in 2022, and will drop sharply to 0.5% by 2023. It is the slowest growing among the world's major economies.
OECD 's forecast on September 26 is even more pessimistic. The eurozone is expected to grow at only 0.3% in 2023, a sharp shrinkage compared with the 1.6% made by the organization in June.
Eurozone's economic prosperity index in September was 93.7, a new low since November 2020, with an expected 95. Among the sub-indicators, the euro zone's industrial prosperity index in September was -0.4, a new low since February last year; the service industry prosperity index was 4.9, and expected to be 7.
European Economic Locomotive Germany's business prosperity index fell to a low of nearly two and a half years in October. The final value of the manufacturing PMI in September was 47.8, a new low since June 2020, falling below the 50 boom-bust line , falling into contraction.
Four major economic research institutions in Germany recently jointly released a report, lowering Germany's economic growth forecast in 2022 from 2.7% to 1.4%, and significantly lowering from 3.1% to shrink by 0.4% in 2023. ING economist Carsten Brzeski said a recession in Germany seems inevitable.
reporter Li Xizi
editor Wang Zhexi
editor Sun Xiao
