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The ECB decision: rate hike to 4% but no clues about a pause for July

Date: March 4, 2024 Time: 02:03:36

The European Central Bank (ECB) has decided this Thursday to raise interest rates in the euro zone again by 25 basis points, up to 4%, a decision that will be explained to Christine Lagarde in just half an hour from the announcement. It is the eighth consecutive rise in the reference rates since it began to move them up in July 2022 when they were at 0%. Regarding what it will do next month, the central bank insists on its approach dependent on economic data and continues without giving clues as to whether it will raise them again or not, although it points to three factors: economic evolution, core inflation and intensity of currency transmission.

“Inflation has fallen, but it is expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its medium-term target of 2% soon. It has accordingly decided to sub lower the three official ECB interest rates by 25 basis points,” the central bank said in its statement.

The ECB reveals an improvement in economic conditions in its updated forecasts. According to June projections, headline inflation will average 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. At the same time, recent interest rate hikes agreed by the Governing Council are having a significant impact on financing conditions and are gradually happening to the entire economy, according to the statement.

“Financing costs have risen markedly and loan growth is slowing. Tighter financing conditions are one of the main reasons why inflation is forecast to continue to decline towards target as which is expected to limit demand more and more”, he adds.

“Indicators of underlying inflationary pressures remain elevated, although some show incipient signs of weakening. Experts have revised their inflation projections excluding energy and food upwards, especially for this year and next, given the unexpected previous increases and the implications of the strength of the labor market for the rate of disinflation”, says the ECB.

They now expect inflation to average 5.1% in 2023 and then drop to 3.0% in 2024 and 2.3% in 2025. In addition, experts have slightly lowered their economic projections for 2023 and 2024. They now forecast that the economy will grow 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.

Cut back on debt purchases

On the other hand, the ECB confirms that it will be able to end debt reinvestments within the framework of the asset purchase program as of July 2023. The size of the APP portfolio -launched by Draghi eight years ago- “is decreasing at a measured and predictable pace” due to the fact that the ECB is not reinvesting the entire principal of the securities that are maturing, that is, it resorts to refinancing but is withdrawing little by little. “The decrease will be, on average, 15,000 million euros per month until the end of June 2023,” he points out.

In relation to the PEPP, the bazooka of 1.85 trillion euros in bonds that it acquired since the 2020 pandemic, the Governing Council plans to reinvest the principal of the assets acquired under the program that are maturing, at least until the end 2024 from the most vulnerable issuers.

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.

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