The European Central Bank is at the forefront of monetary tightening
2023-05-10
■The European Central Bank has slowed down the rate of interest rate hikes but has stated that it will continue to raise rates after June.
■The ECB plans to accelerate the absorption of excess liquidity, and even if the rate of interest rate hikes is slowed down, the tightening effect will still improve.
The European Central Bank (ECB) decided to raise its main policy interest rate by 0.25% at its council meeting on May 4th. This is the seventh consecutive rate hike since the start of a series of rate hikes in July last year, and it is the first time that the normal rate hike has resumed. At the ECB Council meeting on March 16th, due to operational concerns at financial institutions in the United States and Europe, the ECB stated that it is prepared to take policy measures as needed. However, after the market function returned to normal, the statement on May 4th removed the content of measures such as providing liquidity support when necessary. On the other hand, in order to achieve the mid-term inflation, target of 2%, the statement pointed out the policy of raising the policy interest rate to a sufficiently restrictive level and maintaining it at that level if necessary. Although it was not explicitly stated in the statement, the President Lagarde of ECB acknowledged the need for further interest rate hikes at a press conference and made it clear that there are no plans to suspend interest rate hikes, and it is still possible to maintain the same pace of interest rate hikes in the future.
In the Euro area, the contribution of rising energy prices to the inflation target has ended, and the growth rate of the consumer price index (HICP) has reached its peak. However, the underlying inflation rate shown by the core HICP, excluding energy, food, alcohol, and tobacco, is still rising, especially as service prices continue to accelerate in the latest data (early April data). Considering factors such as tight labor demand, rising negotiated wages, and high corporate profit margins, it is expected that the basic inflation rate will remain high. From the perspective of suppressing inflation, it is necessary to extend the implementation time of tightening policies.
The reasons for the slowdown in interest rate hikes by the European Central Bank (ECB) include the tightening of loan standards and a decrease in funding demand as shown in bank loan survey results. By reducing the credit supply, the growth of money circulation is expected to slow down. In addition, the ECB has revised the conditions for the third round of targeted long-term refinancing operation (TLTRO3), encouraging financial institutions to repay loans in advance, and starting from July, stopping the repayment and reinvestment of asset purchase programs (APP’s), accelerating the reduction of holdings of assets. Considering that the unstable operation of the banking industry may be caused by the impairment of holding bonds caused by the central bank's rapid interest rate hike, the obstacles to accelerating interest rate hikes again are high. However, these two policies will absorb excess liquidity, and the effect of interest rate hikes will be more obvious than before. As long as the robustness of the financial system is guaranteed, it is expected that the ECB will continue to gradually increase interest rates. Considering the acceleration of quantitative tightening, the ECB is considered to be one of the most active central banks in the world in terms of financial tightening.
■The ECB plans to accelerate the absorption of excess liquidity, and even if the rate of interest rate hikes is slowed down, the tightening effect will still improve.
The European Central Bank (ECB) decided to raise its main policy interest rate by 0.25% at its council meeting on May 4th. This is the seventh consecutive rate hike since the start of a series of rate hikes in July last year, and it is the first time that the normal rate hike has resumed. At the ECB Council meeting on March 16th, due to operational concerns at financial institutions in the United States and Europe, the ECB stated that it is prepared to take policy measures as needed. However, after the market function returned to normal, the statement on May 4th removed the content of measures such as providing liquidity support when necessary. On the other hand, in order to achieve the mid-term inflation, target of 2%, the statement pointed out the policy of raising the policy interest rate to a sufficiently restrictive level and maintaining it at that level if necessary. Although it was not explicitly stated in the statement, the President Lagarde of ECB acknowledged the need for further interest rate hikes at a press conference and made it clear that there are no plans to suspend interest rate hikes, and it is still possible to maintain the same pace of interest rate hikes in the future.
In the Euro area, the contribution of rising energy prices to the inflation target has ended, and the growth rate of the consumer price index (HICP) has reached its peak. However, the underlying inflation rate shown by the core HICP, excluding energy, food, alcohol, and tobacco, is still rising, especially as service prices continue to accelerate in the latest data (early April data). Considering factors such as tight labor demand, rising negotiated wages, and high corporate profit margins, it is expected that the basic inflation rate will remain high. From the perspective of suppressing inflation, it is necessary to extend the implementation time of tightening policies.
The reasons for the slowdown in interest rate hikes by the European Central Bank (ECB) include the tightening of loan standards and a decrease in funding demand as shown in bank loan survey results. By reducing the credit supply, the growth of money circulation is expected to slow down. In addition, the ECB has revised the conditions for the third round of targeted long-term refinancing operation (TLTRO3), encouraging financial institutions to repay loans in advance, and starting from July, stopping the repayment and reinvestment of asset purchase programs (APP’s), accelerating the reduction of holdings of assets. Considering that the unstable operation of the banking industry may be caused by the impairment of holding bonds caused by the central bank's rapid interest rate hike, the obstacles to accelerating interest rate hikes again are high. However, these two policies will absorb excess liquidity, and the effect of interest rate hikes will be more obvious than before. As long as the robustness of the financial system is guaranteed, it is expected that the ECB will continue to gradually increase interest rates. Considering the acceleration of quantitative tightening, the ECB is considered to be one of the most active central banks in the world in terms of financial tightening.