ECB increases rates again and plans to reduce balance sheet

On Thursday, December 15, the European Central Bank (ECB) increased its interest rate for the fourth time in a row. This time, it rose by 50 basis points. The bank also outlined its intention to start reducing the balance sheet from next March. 

Cumulatively, interest rates have risen by 2.5%, showing a record pace of monetary policy tightening in the eurozone. The central bank’s actions are aimed at fighting inflation, which exceeded the level of 10% this fall. Its growth was spurred by a sharp surge in food, energy and services prices.

Further, the ECB plans to reduce the amount of bonds, which were previously purchased in order to stimulate economic activity. It’ll be a new step in tightening Europe's monetary policy, raising the cost of long-term borrowing. Such a reduction in the balance sheet is known as quantitative tightening.

According to the ECB, the asset purchase program (APP) portfolio will be gradually reduced from March next year. The reduction will average 15 billion euros per month, and this pace will be maintained until the end of the second quarter of 2023.