The European Central Bank opted for a smaller rate hike at Thursday's meeting, setting its key rate from 1.5% to 2%. The ECB also announced that from the beginning of March 2023 it will start reducing its balance sheet by 15 billion euros ($16 billion) a month on average until the end of the second quarter of 2023.
The widely expected 50 basis point hike would be the central bank's fourth hike this year. Last September and October, the ECB chose to raise rates by 75 basis points and by 50 basis points in July, bringing rates out of negative territory for the first time since 2014.
ECB President Christine Lagarde is expected to issue a statement shortly. The interest rate announcement comes after the latest inflation data for the euro zone showed a slight slowdown in price increases in November, although the rate remained at 10% annually.
U.S. Federal Reserve in the early hours of Thursday morning raised its key rate by 0.5 percentage points, as did the Bank of England and the Swiss National Bank on Thursday morning.
The reduction in rate tightening by major central banks has been widespread for several weeks, according to Frederik Ducrozet, global strategist at Pictet Wealth Management.
However, there are several reasons Lagarde could have taken a more hawkish tone in her press conference, Ducrozet continued. These include recent signs that the European zone may experience a milder recession than previously expected, with some countries avoiding contraction during the winter, inflation running higher and more persistently than in the U.S., and the ECB yet to begin form normalization of other policies, including its balance sheet.
Overall, the rate hike was in line with economists' expectations and reflected similar rate hikes by the Bank of England on Thursday and the US Federal Reserve on Wednesday.
Unlike the BoE and Fed, the ECB is signaling higher borrowing costs going forward to reassure investors that it is still serious about fighting inflation, which could remain above the ECB's 2% target until 2025.
"The Governing Council assesses that interest rates still need to rise significantly at a stable rate to reach a sufficiently limited level to ensure a timely return of inflation to the medium-term target of 2%," the ECB said.
