What changed in the European Central Bank statement — 8 September 2022

European Central Bank raised policy at 0.75%. The ECB delivered a historic 75bp hike, frontloading normalization with explicit commitment to further hikes, signaling urgency to combat inflation. However, the acknowledgment of a substantial economic slowdown introduces a stagflationary concern that could temper the pace of tightening.

Decision

Decision: hike
Deposit facility rate: 0.75%

Going into the decision

On the day, the committee read as hawkish — 1.6 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 delivered a historic 75bp hike, frontloading normalization with explicit commitment to further hikes, signaling urgency to combat inflation. However, the acknowledgment of a substantial economic slowdown introduces a stagflationary concern that could temper the pace of tightening.

Inflation — More hawkish. Inflation rhetoric intensifies with actual data (9.1%) and projections above target through 2024, underscoring urgency.
Labour Market — More dovish. New acknowledgment of substantial economic slowdown and stagnation, adding a dovish growth concern absent in prior document.

Previous wording

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.

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 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.

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 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.
rate path: Reinvestment commitment supports liquidity; partially offsets hawkish hike.

Current wording

Based on its current assessment, over the next several meetings the Governing Council expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.
rate path: Explicit commitment to further rate hikes in coming meetings.

According to Eurostat’s flash estimate, inflation reached 9.1% in August.
inflation: Inflation far above target, justifying aggressive action.

The Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.
rate path: Retains flexibility despite the hawkish signal.

The Governing Council today decided to raise the three key ECB interest rates by 75 basis points.
rate path: Largest single hike in ECB history, frontloading normalization.

This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target.
rate path: Emphasizes urgency to bring inflation back to target.

After a rebound in the first half of 2022, recent data point to a substantial slowdown in euro area economic growth, with the economy expected to stagnate later in the year and in the first quarter of 2023.
labour market: Stagflationary backdrop complicates further tightening.

Official statement

Monetary policy decisions

8 September 2022

The Governing Council today decided to raise the three key ECB interest rates by 75 basis points. This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target. Based on its current assessment, over the next several meetings the Governing Council expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations. The Governing Council will regularly re-evaluate its policy path in light of incoming information and the evolving inflation outlook. The Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.

The Governing Council took today’s decision, and expects to raise interest rates further, because inflation remains far too high and is likely to stay above target for an extended period. According to Eurostat’s flash estimate, inflation reached 9.1% in August. Soaring energy and food prices, demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks are still driving up inflation. Price pressures have continued to strengthen and broaden across the economy and inflation may rise further in the near term. As the current drivers of inflation fade over time and the normalisation of monetary policy works its way through to the economy and price-setting, inflation will come down. Looking ahead, ECB staff have significantly revised up their inflation projections and inflation is now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024.

After a rebound in the first half of 2022, recent data point to a substantial slowdown in euro area economic growth, with the economy expected to stagnate later in the year and in the first quarter of 2023. Very high energy prices are reducing the purchasing power of people’s incomes and, although supply bottlenecks are easing, they are still constraining economic activity. In addition, the adverse geopolitical situation, especially Russia’s unjustified aggression towards Ukraine, is weighing on the confidence of businesses and consumers. This outlook is reflected in the latest staff projections for economic growth, which have been revised down markedly for the remainder of the current year and throughout 2023. Staff now expect the economy to grow by 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024.

The lasting vulnerabilities caused by the pandemic still pose a risk to the smooth transmission of monetary policy. The Governing Council will therefore continue applying flexibility in reinvesting redemptions coming due in the pandemic emergency purchase programme portfolio, with a view to countering risks to the transmission mechanism related to the pandemic.

Key ECB interest rates

The Governing Council decided to raise the three key ECB interest rates by 75 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 1.25%, 1.50% and 0.75% respectively, with effect from 14 September 2022.

Following the raising of the deposit facility rate to above zero, the two-tier system for the remuneration of excess reserves is no longer necessary. The Governing Council therefore decided today to suspend the two-tier system by setting the multiplier to zero.

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 started 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 monetary policy 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 Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.

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.