ECB Plans to Go Beyond Rate Hikes and Bond Sale to Combat High Inflation

  • Nov 18, 2022
  • Brian Turner
  • The ECB is struggling to bring down inflation above 10% to its target range of 2%. But higher rates are not impacting inflation trend and may have to take additional steps in restricting economic activities.

    The European Central is likely to continue its campaign of rapid rate hikes in future and plans to begin withdrawing bank stimulus provided during the pandemic era. 

    With inflation at 4-decade high driven by high energy prices and supply chain issues, the central bank is struggling to tame inflation using the blunt tool of interest rate control. 

    The European Central Bank may have to lift rates high enough to be restrictive for the economy in order to bring down inflation to its target rate, said president Christine Lagarde at a speech. 

    The ECB lifted interest rates by 200 basis points since July, including back-to-back 75 basis point increases, but the current rates are not restrictive enough to have an impact on inflation. 

    More rate hikes and the reduction of its 5 trillion euro debt holdings are on the way, said Lagarde. 

    The central bank is largely reliant on interest rates as its main tool in bringing down 4-decade high inflation but the bank is also struggling with a pile of government holdings that are losing value with the rapid hikes in rates. 

    Moreover, the European Central Bank is asking banks to return €296 billion of the money lent during the pandemic era, less than €500 billion expected by markets. 

    "Interest rates are, and will remain, the main tool for adjusting our policy stance," stressed Lagarde. 

    "We expect to raise rates further – and withdrawing accommodation may not be enough," added the ECB president. 

    The ECB also plans to slow its asset purchase program and outline its plan for its balance sheet reduction in December. 

    "We expect to raise rates further – and withdrawing accommodation may not be enough," Lagarde added. 

    The ECB president retained the hawkish stance of the central bank against high inflation and reiterated its commitment to bring down inflation to its target range of 2%. 

    "“The ECB will ensure that a phase of high inflation does not feed into inflation expectations, allowing too-high inflation to become entrenched," said Lagarde. 

    The ECB is expected to lift its deposit rate of 1.5% by at least 50 basis points and some suggest as high as 75 basis point increase at its next meeting in December. 

    The inflation in the eurozone is hovering above 10.1% and may accelerate in winter if energy prices spike again.