The European Central Bank confirmed a 50 basis point interest rate increase, bringing its key rate to 2.5%. The bank pledged to "stay the course in raising interest rates significantly at a steady pace" and intends to hike by another 50 basis points in March. The bank stated that restrictive rate levels would control price rises by dampening demand, and future decisions would be data-dependent.
Eurozone Inflation Update
Eurozone inflation fell for the third month in January, but headline inflation remained high at 8.5%. Core inflation, excluding energy and food, was flat at 5.2%. ECB President Christine Lagarde noted that price pressures remain strong, partly due to high energy costs spreading throughout the economy. Despite growth slowing to 0.1% in the fourth quarter, she stated that the economy was more resilient than expected and should improve over the coming quarters.
Quantitative Tightening and Reinvestment Plan
In December, the ECB announced it would begin reducing its $5.49 trillion balance sheet by $15 billion per month on average until the end of June 2023. Lagarde stated that the balance sheet normalization was not the main tool and should be considered a supplement to higher rates. The ECB will continue partial reinvestments of its maturing debt and allocate remaining reinvestment amounts proportionally. The plan details are based on "continuity and consistency" principles and "simplicity and neutrality."