ECB raises rates, expects further hikes

Rate-setters in Frankfurt went ahead with a 75 basis point interest rate hike but for some observers appeared to hint at the possibility of slower pace of tightening and refrained from any mention of quantitative tightening in its policy statement.

In its policy statement, the European Central Bank did say that policymakers expected to raise rather "further" whilst sticking to their meeting-by-meeting approach.

"In recent months, soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand have led to a broadening of price pressures and an increase in inflation.

"The Governing Council’s monetary policy is aimed at reducing support for demand and guarding against the risk of a persistent upward shift in inflation expectations."

The decision to raise the rates for the main refinancing oprations - its main policy rate -, on the marginal lending facility and deposit facility, to 2.0%, 2.25% and 1.50% had been widely expected.

Neither had any announcement regarding quantitative tightening been expected by most economists.

Nonetheless, according to Jack Allen-Reynolds at Capital Economics, the decision to maintain its guidance for purchases under its Asset Purchase Programme, "rather than announing the beginning of QT, is likely to be seen as slightly dovish."

"But with policymakers openly discussing QT, it wouldn’t be surprising if an announcement came at the next meeting in December," the economist added.

Indeed, in her post-meeting presser, ECB chief economist, Christine Lagarde, said that the governing council would "very defiitely" discuss, decide and I will be very please to announce at the next meeting in December" ahead of a later implementation date.

"There is a clear risk that QT would lead investors to doubt the ECB’s willingness to stand behind the bond markets, causing peripheral spreads to widen significantly," Capital Economics added.

The ECB also raised the interest rate on its loans to commercial banks under its Targeted Longer-term Refinancing Operations facility from 23 November.

On the margin, that might make it easier for the central bank to continue raising rates, Allen-Reynolds said.

Regarding what the so-called 'neutral' interest rate might be which neither stimulates nor restrains activity, Lagarde said she could not say at which pace, or to which level rates would rise.

Regarding what the so-called 'neutral' interest rate might be which neither stimulates nor restrains activity, Lagarde said she could not say at which pace, or to which level rates would rise.

In its statement, the ECB dropped the reference to raising rates over the "next several meetings", declaring instead that "substantial progress" had been made towards withdrawing policy accommodation, Fidelity International noted, Dow Jones Newswires reported.

"As the global energy crisis unfolds with Europe bearing the brunt, the ECB's window of opportunity for aggressive frontloading of policy tightening is shrinking rapidly," Fidelity economist Anna Stupnytska said in a note.

Stupnytska added that Thursday's would be the last such increase in the current tightening cycle with smaller hikes, an earlier pause or the abandoning of tightening relative to expectations.

Lagarde did however later in her press conference say that it might take several meetings to reach the ECB's interest rate goal with decisions being taken on a meeting-to-meeting basis and remaining data dependent.