The European Central Bank has taken action to try to reduce inflation, by increasing three of its main interest rates by 50 basis points (0.5%). The organization signaled that further increases could be on the way, citing that inflation is still too high and is likely to remain so for some time.
The ECB Follows the Fed’s Lead with a 50 Basis Point Increase
The European Central Bank has unveiled its strategy for combating inflation, by raising the interest rates of its main financing operations, marginal credit facility, and deposit facility by 50 basis points (bp) each. The institution stated that this increase is intended to bring the bloc back to its desired 2% inflation rate.
This move follows the same course of action taken by the United States Federal Reserve on December 14, when they too raised their interest rates by 50bp.
Inflation figures for November indicate that the rate is still far below the target of 2%, although a slight improvement has been detected since October, when it was estimated to be 10.6%.
The ECB has suggested that further interest rate hikes may be necessary, saying, “expects to raise them significantly further, because inflation remains too high and is projected to stay above target for too long.”
Warning of a Possible Recession
The ECB has warned of the potential for a recession, as the Eurosystem and other regional central banks predict a brief but severe downturn. The organization stated:
The energy crisis, higher uncertainty, and tighter financial conditions could cause the euro area’s economy to contract in the current or next quarters.
The ECB has also announced that it will be closing its Asset Purchase Program (APP) effective from November. This is expected to have a negative effect on the bond market, as the PPP portfolio is projected to be reduced by 15,000,000,000 Euros per month up until the end of the second quarter of 2023. To counteract this, the ECB can buy various types of assets on the financial markets through its Emergency Purchase Program, which will continue until at least 2024.
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