What changed in the European Central Bank statement — 21 July 2022

European Central Bank raised policy at 0.00%. The ECB shifted decisively hawkish by delivering a 50bp hike and frontloading normalisation, while the introduction of the TPI and data-dependent guidance adds flexibility for further tightening if inflation persists. The overall signal is that the ECB is willing to act aggressively on inflation, but will monitor data and fragmentation risks going forward.

Decision

Decision: hike
Deposit facility rate: 0.00%

Going into the decision

On the day, the committee read as hawkish — 1.8 on a scale where +3 means every member wants higher rates and −3 means every member wants cuts.

Reconstructed from official member remarks published before the decision date. 5 of 27 active members had stored official remarks.

What changed

The ECB shifted decisively hawkish by delivering a 50bp hike and frontloading normalisation, while the introduction of the TPI and data-dependent guidance adds flexibility for further tightening if inflation persists. The overall signal is that the ECB is willing to act aggressively on inflation, but will monitor data and fragmentation risks going forward.

Inflation — Little changed. Both documents maintain strong hawkish inflation rhetoric, with the current reiterating the link between rate hikes and inflation anchoring, representing no material shift in stance.
Labour Market — Little changed. The prior document's neutral labour market assessment is absent from the current document, implying no change in characterisation.
Rate Path — More hawkish. The current document delivers a larger-than-expected 50bp hike and frontloading, with a new TPI enabling further aggressive tightening, despite introducing data-dependent flexibility and reinvestment commitments.
Balance Sheet — Little changed. Prior ended QE (tightening), while current introduces a new TPI (supportive of hikes) and reinvestment commitment (dovish); net balance sheet stance is unchanged.

Previous wording

But inflation pressures have broadened and intensified, with prices for many goods and services increasing strongly.
inflation: Recognises broadening of inflation beyond energy and food, underpinning need for action.

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. This means that headline inflation at the end of the projection horizon is projected to be slightly above the Governing Council’s target.
inflation: Inflation projections revised up and remain above 2% at horizon, warranting tighter policy.

Russia’s unjustified aggression towards Ukraine continues to weigh on the economy in Europe and beyond. It is disrupting trade, is leading to shortages of materials, and is contributing to high energy and commodity prices. These factors will continue to weigh on confidence and dampen growth, especially in the near term.
rate path: Acknowledges downside risks to growth from war and supply disruptions, balancing hawkishness.

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.
labour market: Notes strong labour market as support for growth, reducing immediate recession fears.

The Governing Council decided to end net asset purchases under its asset purchase programme (APP) as of 1 July 2022.
rate path: Ends net QE, consistent with normalisation path.

the Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting.
rate path: Explicit rate hike announcement for July.

If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.
rate path: Opens door to 50bp hike in September if inflation stays high.

Beyond September, based on its current assessment, the Governing Council anticipates that a gradual but sustained path of further increases in interest rates will be appropriate.
rate path: Signals a prolonged hiking cycle beyond September.

Current wording

It will support the return of inflation to the Governing Council’s medium-term target by strengthening the anchoring of inflation expectations and by ensuring that demand conditions adjust to deliver its inflation target in the medium term.
inflation: Explicitly links hike to anchoring expectations and demand adjustment.

The TPI will be an addition to the Governing Council’s toolkit and can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area.
rate path: New tool to prevent fragmentation; allows more aggressive rate hikes.

The Governing Council decided to raise the three key ECB interest rates by 50 basis points.
rate path: Larger hike than expected; signals urgency on inflation.

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.
rate path: Unexpected frontloading; indicates willingness to act forcefully.

The frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions.
rate path: Shift to data-dependent approach adds flexibility; no pre-commitment.

The Governing Council’s future policy rate path will continue to be data-dependent and will help to deliver on its 2% inflation target over the medium term.
rate path: Standard language, but reaffirms inflation target focus.

Official statement

Monetary policy decisions

21 July 2022

Today, in line with the Governing Council’s strong commitment to its price stability mandate, the Governing Council took further key steps to make sure inflation returns to its 2% target over the medium term. The Governing Council decided to raise the three key ECB interest rates by 50 basis points and approved the Transmission Protection Instrument (TPI).

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. It will support the return of inflation to the Governing Council’s medium-term target by strengthening the anchoring of inflation expectations and by ensuring that demand conditions adjust to deliver its inflation target in the medium term.

At the Governing Council’s upcoming meetings, further normalisation of interest rates will be appropriate. The frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions. The Governing Council’s future policy rate path will continue to be data-dependent and will help to deliver on its 2% inflation target over the medium term. In the context of its policy normalisation, the Governing Council will evaluate options for remunerating excess liquidity holdings.

The Governing Council assessed that the establishment of the TPI is necessary to support the effective transmission of monetary policy. In particular, as the Governing Council continues normalising monetary policy, the TPI will ensure that the monetary policy stance is transmitted smoothly across all euro area countries. The singleness of the Governing Council’s monetary policy is a precondition for the ECB to be able to deliver on its price stability mandate.

The TPI will be an addition to the Governing Council’s toolkit and can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area. The scale of TPI purchases depends on the severity of the risks facing policy transmission. Purchases are not restricted ex ante. By safeguarding the transmission mechanism, the TPI will allow the Governing Council to more effectively deliver on its price stability mandate.

In any event, the flexibility in reinvestments of redemptions coming due in the pandemic emergency purchase programme (PEPP) portfolio remains the first line of defence to counter risks to the transmission mechanism related to the pandemic.

The details of the TPI are described in a separate press release to be published at 15:45 CET.

Key ECB interest rates

The Governing Council decided to raise the three key ECB interest rates by 50 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 0.50%, 0.75% and 0.00% respectively, with effect from 27 July 2022.

Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)

The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance.

As concerns the PEPP, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

Redemptions coming due in the PEPP portfolio are being reinvested flexibly, with a view to countering risks to the transmission mechanism related to the pandemic.

Refinancing operations

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.

***

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 President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:45 CET today.

Background reading

Cadence's comparison is generated from the official documents. Read the methodology.