The ECB complies with the script and raises interest rates by a quarter point, up to 4%

The ECB will end the reinvestments of its asset purchase program from July

The Governing Council of the European Central Bank (ECB) has decided to raise interest rates by 25 basis points, as taken for granted by market consensus, so that the reference rate for its refinancing operations will be at 4%, while the deposit rate will reach 3.50% and the loan facility rate will reach 4.25%.

"Inflation has fallen, but it is expected to remain too high for too long," the institution has indicated, stressing that the ECB's governing body is determined to ensure that inflation returns to its 2% target soon. medium term.

With this eighth consecutive rise in the price of money, which has reached its highest level in almost 15 years, the ECB continues with the tightening of its monetary policy, after the Federal Reserve of the United States decided yesterday to pause in the cycle of increases, after ten consecutive increases since March 2022.

With the quarter-point rise announced this Thursday by the ECB, in line with the one adopted in May, the 'Guardian of the euro' has raised the price of money by 400 basis points during the current cycle of increases, which began in July of last year.

The ECB's decision, expected by the market, comes after the year-on-year inflation rate in the euro zone slowed down in May to 6.1%, nine tenths below the price rise registered in April and its highest level. low since February 2022, while excluding the impact of energy and food, alcohol and tobacco from the calculation, the underlying rate eased to 5.3% from 5.6% the previous month.

Likewise, a week ago Eurostat revised downward its growth data for the gross domestic product (GDP) of the euro zone, which finally registered a contraction of 0.1% in the first quarter of 2023, which means the entry into recession. technique of the region's economy, after the drop in activity also of 0.1% in the fourth quarter of 2023.

This is the first recession recorded in the euro zone economy since GDP contracted consecutively in the first and second quarters of 2020, as a result of the impact of the Covid-19 pandemic and the restrictions implemented.

In its analysis, the ECB has highlighted that the previous rate hikes agreed by the Governing Council "are being strongly transmitted to financing conditions and are gradually affecting the entire economy", stressing that financing costs have increased sharply and loan growth is slowing.

"The tightening of financing conditions is one of the main reasons why inflation is expected to continue declining towards the target, as it is expected to increasingly curb demand," he pointed out.

In any case, the ECB has reiterated that the Governing Council will continue to apply a data-driven approach to determine the appropriate level of tightening and its duration.

"In particular, its interest rate decisions will continue to be based on its assessment of the inflation outlook taking into account new economic and financial data, underlying inflation dynamics, and the intensity of monetary policy transmission." , has defended.

In this way, the main interest in the press conference that will be offered next by the president of the ECB, Christine Lagarde, will be to know if the central bank of the euro zone offers any clue about the path that the entity still has to follow in the current cycle of increases given the weakening of the economy and the slowdown in energy price increases, together with financial tensions.

END OF REINVESTMENTS.

On the other hand, the Governing Council of the ECB has confirmed this Thursday that it will put an end to reinvestments within the framework of the asset purchase program (APP) as of July 2023.

In this regard, it has indicated that the size of the portfolio of its PPP program is decreasing at a measured and predictable rate, given that the Eurosystem is not fully reinvesting the principal of maturing securities.

In this way, it estimates that the decrease will be, on average, 15,000 million euros per month until the end of June 2023.

With regard to the PEPP, the emergency purchase program during the pandemic, the Governing Council plans to reinvest the principal of the securities acquired under the program that mature at least until the end of 2024.

"In any case, the future extinction of the PEPP portfolio will be managed in such a way as to avoid interference with the appropriate orientation of monetary policy," he explained.

Likewise, the Governing Council has ensured that it will continue to act with flexibility in the reinvestment of the principal of the PEPP portfolio securities that are maturing, with the aim of counteracting the risks to the monetary policy transmission mechanism related to the pandemic. .