Europe | ECB pulling out almost all the stops

Thursday’s ECB meeting was presented a priori with two points of interest on the table, aside from the 75 basis point rate hike which had been widely anticipated by markets and analysts thanks to a fairly direct communication from the central bank itself.

Key points

• Key points:
• Firstly, the meeting addressed the pattern of interest rate hikes going forward, after the two big main central banks had adopted a decidedly hawkish stance over the summer. The other key issue at the meeting was how the ECB would seek to reduce its balance sheet to accompany the rate hike process.
• With the UK’s mini-crisis now in the rear mirror, and with commodity prices (and lately also European gas) easing somewhat, it remained to be seen how the ECB would strike a balance between the clear risks of recession (its September forecast for 2023 growth had been surprisingly positive at 0.9%) and rampant inflation.
• The interest rate path will be decided on a month-by-month basis, depending on how the figures pan out, and taking into account that rates have already risen by 200 basis points and that this will take time to feed through to inflation.
• While the message sounds slightly dovish, the ECB has made it clear that there are more hikes to come, which will probably lead them to raise rates by a further 75 points between December and February, in line with our forecasts and below what the market was expecting ahead of the meeting.
• To reduce its balance sheet, the ECB has decided to recalibrate TLTRO refinancing operations, by making the funding cost for banks more expensive (and encouraging early repayment of these funds, which in turn would speed up the process of reducing its balance sheet), thus leading to an increase in the cost of borrowing for the wider economy, with the consequent anti-inflationary effect.

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