What changed in the European Central Bank statement — 2 February 2023

European Central Bank raised policy at 2.50%. The February statement reinforces the hawkish stance with a pre-commitment to a 50bp hike in March, while omitting explicit inflation or balance sheet updates, signalling a continued tightening path. The next decision is likely a 50bp hike as telegraphed.

Decision

Decision: hike
Deposit facility rate: 2.50%

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 February statement reinforces the hawkish stance with a pre-commitment to a 50bp hike in March, while omitting explicit inflation or balance sheet updates, signalling a continued tightening path. The next decision is likely a 50bp hike as telegraphed.

Inflation — Little changed. No new inflation assessment in current key passages; prior hawkish inflation language is not updated.
Labour Market — Little changed. No labour market passages in either document.
Rate Path — More hawkish. Current document adds explicit pre-commitment to a 50bp hike in March, stronger than prior's 'expects to raise further'.
Balance Sheet — Little changed. No balance sheet language in current key passages; prior APP reduction plan remains in place.

Previous wording

The Governing Council today decided to raise the three key ECB interest rates by 50 basis points and, based on the substantial upward revision to the inflation outlook, expects to raise them further.
rate path: Rate hike decision and explicit link to higher inflation outlook signal ongoing tightening.

In particular, the Governing Council judges that interest rates 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% medium-term target.
rate path: Clear guidance that rates need to rise 'significantly' at a 'steady pace', reinforcing hawkish stance.

Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations.
rate path: Emphasis on guarding against inflation expectations drift justifies prolonged restrictive policy.

The Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.
rate path: Reiterates data dependence, leaving flexibility but no dovish pivot signal.

From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time.
balance sheet: Quantitative tightening starts March 2023 with a defined pace, adding to policy tightening.

According to Eurostat’s flash estimate, inflation was 10.0% in November, slightly lower than the 10.6% recorded in October. The decline resulted mainly from lower energy price inflation. Food price inflation and underlying price pressures across the economy have strengthened and will persist for some time.
inflation: Underlying pressures strengthening and persistent, indicating inflation is broad-based and sticky.

Amid exceptional uncertainty, Eurosystem staff have significantly revised up their inflation projections. They now see average inflation reaching 8.4% in 2022 before decreasing to 6.3% in 2023, with inflation expected to decline markedly over the course of the year.
inflation: Significant upward revision to inflation projections supports further rate hikes.

The euro area economy may contract in the current quarter and the next quarter, owing to the energy crisis, high uncertainty, weakening global economic activity and tighter financing conditions. According to the latest Eurosystem staff projections, a recession would be relatively short-lived and shallow.
rate path: Acknowledges recession risk but dismisses as shallow, not deterring tightening bias.

Current wording

the Governing Council today decided to raise the three key ECB interest rates by 50 basis points
rate path: Rate hike confirms tightening stance.

it expects to raise them further
rate path: Signal of more tightening ahead.

the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March
rate path: Explicit pre-commitment to March hike.

it will then evaluate the subsequent path of its monetary policy
rate path: Opens door for data-dependent decisions after March.

guard against the risk of a persistent upward shift in inflation expectations
rate path: Shows upside inflation risk is a key concern.

Official statement

Monetary policy decisions

2 February 2023

The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target. Accordingly, the Governing Council today decided to raise the three key ECB interest rates by 50 basis points and it expects to raise them further. In view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. In any event, the Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.

The Governing Council today also decided on the modalities for reducing the Eurosystem’s holdings of securities under the asset purchase programme (APP). As communicated in December, the APP portfolio will decline by €15 billion per month on average from the beginning of March until the end of June 2023, and the subsequent pace of portfolio reduction will be determined over time. Partial reinvestments will be conducted broadly in line with current practice. In particular, the remaining reinvestment amounts will be allocated proportionally to the share of redemptions across each constituent programme of the APP and, under the public sector purchase programme (PSPP), to the share of redemptions of each jurisdiction and across national and supranational issuers. For the Eurosystem’s corporate bond purchases, the remaining reinvestments will be tilted more strongly towards issuers with a better climate performance. Without prejudice to the ECB’s price stability objective, this approach will support the gradual decarbonisation of the Eurosystem’s corporate bond holdings, in line with the goals of the Paris Agreement.

The detailed modalities for reducing the APP holdings 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 3.00%, 3.25% and 2.50% respectively, with effect from 8 February 2023.

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 until the end of February 2023. Subsequently, the APP portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of June 2023 and its subsequent pace will be determined over time.

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.

The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.

Refinancing operations

As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations are contributing to its monetary policy stance.

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The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to 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.