The ECB slowed the pace of its rate increases, raising its three main interest rates by 50 basis points, compared to 75 at its last meeting. It will also start winding down its asset purchase program starting March.

In what is starting to look like a concerted effort by major central banks to slow the pace of their interest rate increases, the European Central Bank (ECB) raised its benchmark interest rate by 50 basis points rather than 75 as at its previous meeting, following similar moved by the Fed yesterday and the Swiss National Bank (SNB) earlier today.

Based on a «substantial upward revision» to the outlook for inflation, the governing council expects the ECB «will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2 percent medium-term target,» according to a statement following the decision.

Following the increases, the rate on ECB's main refinancing operations is 2.50 percent with those for the marginal lending and deposit facilities at 2.75 and 2.00 respectively.

Winding Down APP

Starting in March, the ECB will reduce its holdings in its asset purchase program (APP) by not reinvesting all of the principal payments from maturing securities. It will reduce its APP portfolio at a «measured and predictable» pace, with the decline amounting to 15 billion euros per month until the end of the second quarter of next year when it will determine at what the subsequent pace of the reductions will be.

At the end of next year, the ECB said it will review its operational framework for steering short-term interest rates and give an update on what the endpoint of the balance sheet normalization process looks like.

A central bank reducing its balance sheet also acts as a tightening of monetary policy. Earlier today, the Swiss national bank made no mention of any plans for its balance sheet.

Inflation Forecasts

Inflation forecasts were «significantly revised» with expectations it will average 8.4 percent in the eurozone this year, slowing to 6.3 percent and declining «markedly» over the year. For 2024, inflation is seen at 3.4 and then 2.3 percent in 2025, which is just about the ECB's target of 2 percent.

The governing council said it «stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term.»


Pandemic Program 

In contrast to the APP, the ECB will continue to invest the principal payments from maturing securities in the pandemic emergency purchase program (PEPP) until at least the end of 2024.