Bond holdings are reduced
ECB increases key interest rate by 0.5 percentage points
12/15/2022, 2:16 p.m
The European Central Bank is bracing itself against the high inflation with another interest rate hike. The key interest rate in the euro area will rise by 0.5 percentage points to 2.5 percent. From next spring, the ECB intends to gradually reduce its bond portfolio.
The European Central Bank – in short: ECB – is slowing down the pace of interest rate hikes in the fight against high inflation. The currency watchdog around ECB boss Christine Lagarde decided to raise the key interest rate by half a percentage point – to 2.5 percent. The central bank announced this on Thursday in Frankfurt after a meeting of the ECB Council. In October and September they had raised interest rates in jumbo steps by 0.75 percentage points each.
The ECB also announced that it intends to gradually reduce its bond holdings from March 2023. From then on, funds from expiring securities of its multi-trillion general purchase program APP will no longer be fully invested in the purchase of new bonds. By the end of the second quarter of 2023, inventories are to be reduced by an average of 15 billion euros per month.
In view of inflation that had been dangerously low for a long time, monetary authorities had started buying government bonds and other securities on a large scale in March 2015. The ECB worried about a dangerous spiral of price cuts across the board and a concomitant contracting economy.
In the meantime, inflation in the euro area, fueled by high energy and food prices, has risen significantly. As a result, the ECB stopped buying new securities as part of the APP purchase program on July 1, 2022. So far, however, funds from securities whose terms are ending have been reinvested in their entirety. In total, the euro central banks invested more than 3.4 trillion euros in government bonds and corporate securities as part of the program by the end of November of the current year.