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ECB raises interest rates, sees significant increases ahead as it announces plan to shrink balance sheet

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

Thierry Monasse | Getty Images News | Getty Images

The European Central Bank opted for a smaller interest rate increase at Thursday̵[ads1]7;s meeting, taking the key rate from 1.5% to 2%.

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

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ECB raises interest rates, sees significant increases ahead as it announces plan to shrink balance sheet


It said it would announce more details about the reduction in its asset purchase program inventory in February and that it would regularly reassess the reduction to ensure it was consistent with its monetary policy strategy.

The widely expected increase of 50 basis points is the central bank’s fourth increase this year.

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

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

The central bank said it is working with inflation forecasts that have been “significantly revised upward” and sees inflation remaining above its 2% target until 2025.

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

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

ECB President Christine Lagarde is due to hold a press conference around 14:45 CEST.

It comes after the latest inflation data for the euro zone showed a slight slowdown in price rises in November, although the rate remains at 10% annually.

The US central bank increased the key interest rate by 0.5 percentage points on Wednesday, as did the Bank of England and the Swiss National Bank on Thursday morning.

“Unlike the Bank of England, this is a hawkish hike, given the language of it [quantitative tightening] and a definitive start date,” analysts at BMO Capital Markets said.

However, they noted that the ECB is lagging behind other central banks in reducing its balance sheet and that reinvestment under its pandemic emergency purchase program will continue.

“The language of the statement has an operational feel, and the bank leaves the path to QT open,” they wrote in a note.

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