ECB rate decision July 2023: raises rates by 25 basis points

Even after the unexpected half-point increase, the bank “is moving much too slowly toward an interest rate level that is appropriate in view of high inflation,” Jörg Krämer, the chief economist at Commerzbank, wrote in a note to clients. The APP portfolio is declining at a measured and predictable pace, as the Eurosystem does not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of June 2023. The Governing Council will discontinue the reinvestments under the APP as of July 2023. The Governing Council expects to discontinue the reinvestments under the APP as of July 2023.

But as the pandemic roiled supply chains — pushing up shipping costs, shutting down factories, and spurring supply shortages — and government relief programs shored up demand, price increases took off. Now, the war in Ukraine is exacerbating the issue by raising the costs of key commodities. As central banks around the world have begun to raise interest rates, the value of debt with a negative yield has fallen to around $2.1 trillion, from more than $11 trillion at the start of the year, according to Bloomberg. Other European bond yields were steadier as investors await the ECB’s decision on rates. In one swoop, the E.C.B. has ended the era of negative interest rates, bringing its deposit rate, which is what banks receive for depositing money with the central bank overnight, to zero, from minus 0.5 percent. The European Central Bank raised its three key interest rates by a half a percentage point, surprising markets with a move twice as large as expected.

This is only 30% of its capacity, Klaus Mueller, the president of Germany’s energy regulator, the Federal Network Agency, said on Twitter. Russia has resumed critical gas supplies to Europe through Germany, reopening the Nord Stream gas pipeline after 10 days, but uncertainty lingers over whether the continent can avert an energy crisis this winter. The firms de-branded the drug, previously known as Epanutin, which meant it was no longer subject to price regulation and the firms could set prices at their discretion.

Phenytoin is an essential drug relied on daily by thousands of people throughout the UK to prevent life-threatening epileptic seizures. These firms illegally exploited their dominant positions to charge the NHS excessive prices and make more money for themselves – meaning patients and taxpayers lost out. The CMA had issued an infringement decision in December 2016, finding that the companies’ behaviour broke competition law, which was challenged by Pfizer and Flynn in a lengthy appeal process. In March 2020, the Court of Appeal dismissed Flynn’s appeal in its entirety and the CMA reinvestigated the matter.

The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises at its 2% target over the medium term. The Governing Council’s new TPI will safeguard the smooth transmission of its monetary policy stance throughout the euro area. The bank’s new policy tool, the Transmission Protection Instrument, is intended to stop disorderly moves in government bond markets. In short, the new tool will allow the bank to buy the bonds of countries it believes are experiencing an unwarranted deterioration in financing conditions.

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On Wednesday, the European Commission urged member countries to immediately start rationing the use of the fuel to avoid energy shortages that would stall economic growth and leave households cold in the winter. Raising interest rates was the crucial next step in ending the European Central Bank’s era of ultraloose monetary policy support. But the central bank’s mandate is price stability, so acting to ease inflation must be seen to be its priority, even as price increases vary wildly across the bloc. The Governing Council decided to raise the three key ECB interest rates by 25 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 4.00%, 4.25% and 3.50% respectively, with effect from 21 June 2023.

Credit Suisse shares tumbled by as much as 30% in Wednesday intraday trade, and the whole banking sector ended the Wednesday session down by about 7%. Keep abreast of significant corporate, financial and political developments around the world. Stay informed and spot emerging risks and opportunities with independent global reporting, expert
commentary and analysis you can trust. Lagarde said the reduction of the ECB’s government bond holdings was not discussed, but that a – probably fractious – debate on that topic is likely to start soon. In a move which may be fought by commercial banks, it curbed the subsidy it provides to such lenders through 2.1 trillion euros worth of ultra-cheap three-year loans called Targeted Longer-Term Refinancing Operations, or TLTROs.

Four months ago the group spooked the market by delaying financial results after the auditor refused to sign off on the accounts. It later published them in early May, pledging to strengthen its financial controls after it discovered weaknesses and a lack of documentation in its content division. “We are determined to return inflation back to 2% in the medium term, that should not be doubted, the determination is intact,” she said. Standard Digital includes access to a wealth of global news, analysis and expert opinion. Premium Digital includes access to our premier business column, Lex, as well as 15 curated newsletters covering key business themes with original, in-depth reporting.

These factors will continue to weigh on confidence and dampen growth, especially in the near term. However, the conditions are in place for the economy to continue to grow on account of the ongoing reopening of the economy, a strong labour market, fiscal support and savings built up during the pandemic. This outlook is broadly reflected in the Eurosystem staff projections, which foresee annual real GDP growth at 2.8% in 2022, 2.1% in 2023 and 2.1% in 2024. Compared with the March projections, the outlook has been revised down significantly for 2022 and 2023, while for 2024 it has been revised up. In May inflation again rose significantly, mainly because of surging energy and food prices, including due to the impact of the war.

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Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.75%, 4.00% and 3.25% respectively, with effect from 10 May 2023. Swaps trading now imply a roughly two-in-three chance the ECB will hike interest rates from the deposit rate’s current 3.75%. That’s as the central bank has to balance inflation still uncomfortably high, at 5.3% year-over-year for both the headline and for core, with survey data showing the economy weakening, if not unravelling.

But inflation pressures have broadened and intensified, with prices for many goods and services increasing strongly. These projections indicate that inflation will remain undesirably elevated for some time. However, moderating energy costs, the easing of supply disruptions related types of social audit to the pandemic and the normalisation of monetary policy are expected to lead to a decline in inflation. The new staff projections foresee annual inflation at 6.8% in 2022, before it is projected to decline to 3.5% in 2023 and 2.1% in 2024 – higher than in the March projections.

And analysts are questioning how high the bank can raise rates before the economic outlook deteriorates too much and the bank has to stop. Ms. Lagarde said on Thursday that the larger-than-expected rate increase didn’t change how high the bank expected to raises rates overall, though she didn’t say what rate the central bank was aiming to reach. The Governing Council will continue to monitor bank funding conditions and ensure that the maturing of operations under the third series of targeted longer-term refinancing operations (TLTRO III) does not hamper the smooth transmission of its monetary policy. The Governing Council will also regularly assess how targeted lending operations are contributing to its monetary policy stance. As announced previously, the special conditions applicable under TLTRO III will end on 23 June 2022.

Leaked inflation forecast turns ECB expectations toward a hike

Last week, the euro briefly fell to parity with the U.S. dollar for the first time in 20 years. Some of the first few questions to Lagarde are about Italy but Lagarde is avoiding discussing politics (or even naming any countries). Instead, she’s saying that the new policy tool has specific eligibility criteria and it will be entirely up to the Governing Council to activate its use for any country as long as it meets the right conditions.

Investors are grappling with the twin headwinds of inflation and rising interest rates. Neither are positive for companies or their stock prices, but higher rates remain the lesser of two evils for now, as investors fret more about the damaging effect of central bank inaction over high inflation. As a result, the E.C.B.’s decision to raise interest rates more aggressively than expected is being broadly welcomed by investors, with stock markets now moving higher. “One should not forget that despite today’s rate hike, the E.C.B. is still deploying a distinctly more accommodative monetary policy than other major central banks,” said Wolfgang Bauer, a fund manager at M&G Investments. “If inflation continues to reign supreme, there is still a lot of catching up to do,” Bauer said. These days, policymakers are walking a fine line between easing price pressures and drawing the European economy into a recession.

But as there was when an earlier policy instrument was announced in the depths of the 2012 European debt crisis, there is a hope that the announcement alone will calm bond markets and that the tool will not have to be used. On Thursday, the bank also introduced a policy tool to limit the divergence in borrowing costs across the eurozone’s 19 members, which it said was part of the reason it was able to raise interest rates more than expected. Tightening monetary policy had revived investors’ concerns about the fiscal stability of the bloc’s most indebted members. Amid fears over Europe’s energy supply from Russia, and with the economic outlook worsening, the central bank said it chose to “front-load” its rate increases.

• A quarter of the UK’s £2.5tn government debt is index-linked, making the cost of servicing it vulnerable to rising inflation.
• The rate on the deposit facility and the rate on the marginal lending facility define a floor and a ceiling for the overnight interest rate at which banks lend to each other.
• This decision is based on the Governing Council’s updated assessment of inflation risks…
• The central bank was “very likely” to raise rates again in July, Christine Lagarde, president of the ECB told reporters after the rate decision was announced.

European officials were keen to stress that the situation in Europe is different from the one in the United States. Overall, there is less deposit concentration — SVB was an important lender to the tech and health-care sectors — deposit flows seem stable, and European banks are well capitalized since the regulatory transformation that followed the global financial crisis. The move will boost borrowing costs over the remaining lifetime of the facility, providing lenders an incentive to repay them early. Worried that rapid price growth is becoming entrenched, the ECB is raising borrowing costs at the fastest pace on record. Further steps are almost certain as unwinding a decade’s worth of stimulus will take it well into next year and beyond.

Monetary policy instruments

An ECB survey showed that corporate loans in the euro zone dropped to their lowest level ever between the middle of June and early July. Speaking at a news conference, European Central Bank President Christine Lagarde said, “Our assessment of data will tell us whether and how much ground we have to cover.” “Inflation continues to decline but is still expected to remain too high for too long,” the bank said Thursday in a statement.

It’s very good when a whole team, 25 members around the table are completely aligned in support for a transmission instrument that will support monetary policy going forward. UK and European shares are drifting lower, while the Italian market is down 2.3% amid the political chaos there. Mario Draghi is expected to quit as prime minister today after he failed to garner support from three key partners in his unity government yesterday. Soaring inflation pushed interest payments on UK debt to a record high in June, putting the government’s budget deficit on course to reach more than £100bn this year, almost double its pre-pandemic level. The euro, bond yields and European bank shares all rose on the announcement, but the shares soon gave up their gains. In December, the bank had projected a 6.3% inflation figure for 2023 and a 3.4% rate in 2024.

In reaction, German Finance Minister Christian Lindner welcomed the ECB’s determination to fight inflation while Italy’s new economy minister Giancarlo Giorgetti said the ECB needed to take the slowdown into account. While this neutral rate is an undefined concept, most policymakers appear to put it at roughly 1.5-2%, suggesting the ECB is now at the bottom end of the estimated range. Investors now see rates peaking at around 2.6% next year, below expectations for close to 3%, seen recently. Markets nevertheless took Lagarde’s comments that a “substantial” part of policy tightening is done as a sign that rates may not go as high as previously thought. Neil Birrell, chief investment officer at Premier Miton Investors, said in a statement, “If rates are yet not at the peak, we are not far away, and the conversation may soon move to how long they will stay at the peak.” The new tool is expected to come with fewer conditions for a country to benefit from it.

ECB raises interest rates by quarter of a point to tame inflation

However, markets were reassured by the ECB’s statement Thursday, and bond yields fell in the euro zone. The central bank’s commitment to more purchases will support bond prices and in turn helps to keep borrowing costs lower. The European Central Bank has raised interest rates by a bigger-than-expeced half point, taking its key deposit rate (which was negative) to 0% and hinted at further rate hikes in the coming months. It was its first rate hike in 11 years and was triggered by soaring inflation, which reached 8.6% last month, far above its 2% target. The Governing Council judged that it is appropriate to take a larger first step on its policy rate normalisation path than signalled at its previous meeting. This decision is based on the Governing Council’s updated assessment of inflation risks and the reinforced support provided by the TPI for the effective transmission of monetary policy.

Lagarde argued that the ECB may have to “go beyond” normalisation, a comment suggesting that rates may go to a level that starts restrictive economic activity. The Governing Council undertook a careful review of the conditions which, according to its forward guidance, should be satisfied before it starts raising the key ECB interest rates. As a result of this assessment, the Governing Council concluded that those conditions have been satisfied. The ECB also announced Thursday that it will set the remuneration of minimum reserves to 0% — which means that banks will not earn any interest from the central bank on their reserves. Euro zone business activity data released earlier this week pointed to declines in the region’s biggest economies, Germany and France. The figures added to expectations that the euro area could slip back into recession this year.

The new policy tool, which is called a Transmission Protection Instrument, will “counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area,” the bank said. This new tool, called the Transmission Protection Instrument, is intended to stop disorderly moves in government bond markets. In short, the new tool will allow the E.C.B. to buy bonds of countries it believes are experiencing an unwarranted https://1investing.in/ deterioration in financing conditions. The scale of the bond purchases will depend on the severity of the risks involved and are not restricted, the bank said. The global outlook has worsened in recent months, as inflation rises in seemingly every corner of the economy and pandemic-induced disruptions continue to wreak havoc on supply chains. For the eurozone, the bloc of 19 countries that use the euro, the dimming outlook has been particularly acute.

• Government bond yields have shot higher, as investors adjust to the larger-than-expected rate increase from the E.C.B.
• The CMA had issued an infringement decision in December 2016, finding that the companies’ behaviour broke competition law, which was challenged by Pfizer and Flynn in a lengthy appeal process.
• However, this is a tricky issue for the central bank, which cannot be seen to act directly to address bond yields as this isn’t part of its mandate.
• However, the conditions are in place for the economy to continue to grow on account of the ongoing reopening of the economy, a strong labour market, fiscal support and savings built up during the pandemic.

Headline inflation expectations have also been revised, with the core figure now expected to average 5.4% in 2023, 3% in 2024 and 2.2% in 2025, according to Eurosystem data, meaning the central bank is now not expecting to reach its target rate of 2% before 2026. The latest decision left the Fed’s key borrowing rate in a target range of 5%-5.25%.The central bank forecast it will raise interest rates as high as 5.6% before 2023 is over. The ECB has put new life into the euro with its surprise 50bps rate hike, and its strong words on its new crisis-fighting mechanism are designed to add to the sense that the central bank is serious about confronting the twin challenges that it faces. Lagarde also pushed back on political criticism that rapid rate hikes threatened to push the euro zone into recession, arguing that her job was to get inflation under control. In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time. Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.