ECB Raises Interest Rates to Tackle High Inflation Pressures

The European Central Bank (ECB) has announced a 25 basis point increase in three key interest rates to tackle high inflation pressures. Despite headline inflation declining over recent months, underlying price pressures remain strong, prompting the decision to raise interest rates. The ECB’s Governing Council has pledged to continue using a data-dependent approach to determine the appropriate level and duration of restriction, with the goal of achieving a timely return of inflation to the 2% medium-term target.

The ECB has also confirmed its intention to continue reducing the Eurosystem’s asset purchase programme (APP) portfolio at a predictable pace, with the expectation of discontinuing the reinvestments under the APP from July 2023. Meanwhile, the Pandemic Emergency Purchase Programme (PEPP) will see principal payments from maturing securities reinvested until at least the end of 2024.

With these measures, the ECB’s Governing Council is demonstrating its readiness to adjust all its instruments within its mandate to achieve its inflation target and preserve the smooth functioning of monetary policy transmission. The ECB’s policy toolkit remains equipped to provide liquidity support to the euro area financial system, and the Transmission Protection Instrument is available to counter any unwarranted, disorderly market dynamics that may pose a serious threat to monetary policy transmission across all euro area countries.

Overall, the ECB’s recent policy decisions reflect a continued focus on addressing inflation pressures, with interest rate hikes and asset purchase programme reductions being key tools in achieving its medium-term target. The ECB’s Governing Council remains committed to a data-dependent approach to ensure the appropriate level and duration of restriction, with its policy toolkit fully equipped to provide liquidity support to the euro area financial system if needed.