The European Central Bank (ECB) announced on Thursday that it raised its key rates by 50 basis points (bps) following the December policy meeting as expected. 

With this decision, 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 2.5%, 2.75% and 2% respectively.

Follow our live coverage of the market reaction to the ECB’s policy announcements.

Market reaction

The EUR/USD pair edged higher with the initial reaction and was last seen trading at 1.0640, where it was still down 0.4% on a daily basis.

Key takeaways from policy statement

“ECB today decided to raise three interest rates by 50 basis points and, based on substantial upward revision to inflation outlook, expects to raise them further.”

“In particular, ECB 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 2% medium-term target.”

“Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against risk of a persistent upward shift in inflation expectations.”

“ECB’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.”

“Interest rates are ECB’s primary tool for setting monetary policy stance.”

“From beginning of March 2023 onwards, APP portfolio will decline at a measured and predictable pace, as Eurosystem will not reinvest all of principal payments from maturing securities.”

“Decline will amount to €15 billion per month on average until end of second quarter of 2023 and its subsequent pace will be determined over time.”

“At its February meeting, ECB will announce detailed parameters for reducing APP holdings.”

“ECB will regularly reassess pace of APP portfolio reduction to ensure it remains consistent with overall monetary policy strategy and stance, to preserve market functioning, and to maintain firm control over short-term money market conditions.”

“By end of 2023, ECB will also review its operational framework for steering short-term interest rates, which will provide information regarding the endpoint of the balance sheet normalisation process.”

“ECB decided to raise interest rates today, and expects to raise them significantly further, because inflation remains far too high and is projected to stay above target for too long.”

“According to Eurostat’s flash estimate, inflation was 10.0% in November, slightly lower than 10.6% recorded in October.”

“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.”

“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 course of year.”

“Inflation is then projected to average 3.4% in 2024 and 2.3% in 2025.”

“Inflation excluding energy and food is projected to be 3.9% on average in 2022 and to rise to 4.2% in 2023, before falling to 2.8% in 2024 and 2.4% in 2025.”

“Euro area economy may contract in current quarter and next quarter, owing to energy crisis, high uncertainty, weakening global economic activity and tighter financing conditions.”

“According to latest Eurosystem staff projections, a recession would be relatively short-lived and shallow.”

“Growth is nonetheless expected to be subdued next year and has been revised down significantly compared with previous projections.”

“Beyond near term, growth is projected to recover as current headwinds fade.”

“Eurosystem staff projections now see economy growing by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024 and 1.8% in 2025.”

This article was originally published by Fxstreet.com.Read the original article here.

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