ECB Delivers 25bp Rate Hike, Says Further Increases Likely In July
ECB President Christine Lagarde
- Staff raises inflation forecasts, cuts growth outlook
- Higher interest rates being “transmitted forcefully”
- EUR shows gains against USD, GBP
- German 10-year bond yield improves
- Pause in hikes “not discussed”
By Eric Culp
European Editor, LiveSquawk News
@EricCulpLS
https://twitter.com/EricCulpLS
15 June 2023 | 14:50 GMT
FRANKFURT – The European Central Bank all but promised to increase its key interest rates by 25 basis points this week, and after delivering on Thursday, the public lender’s president told investors to expect another hike in six weeks time.
“Barring a material change to our baseline, it is very likely that we will continue to raise rates in July,” Christine Lagarde said at the press conference following Thursday’s rate decision.
And with that, the bank has jettisoned its strategy of tailoring monetary policy to the latest economic information, at least according to one analyst. “Here we go again from forward guidance to meeting-by-meeting to data dependent to pre-announcing the next rate hike,” tweeted Carsten Brzeski, head of macroeconomics at ING Bank.
This type of protean shifting is clearly off-putting for many, but the ECB Governing Council seems to be steadfastly hawkish, at least for the moment. And the reason for the bank’s eighth straight hike and the high likelihood of another increase in July is the numbers, according to Lagarde. “We looked very much at the data. That is the reason we increased all three rates. Are we done? Have we finished the journey? No. We are not at the destination.”
The ECB's June inflation projections (blue) versus the March forecasts.
Pauses? We don’t need no stinking pauses
Lagarde pushed back on suggestions that the Eurozone’s lender of last resort might follow the lead of its American counterpart, the US Federal Reserve, and take a break from its current path of monetary tightening. The Fed left its interest rates unchanged less than 24 hours before the ECB decision, but pausing or skipping hikes is currently not a talking point in Frankfurt. “We have not discussed it all,” Lagarde said.
While the path seems clear – at least one more rate increase – it has also become treacherous, noted Brzeski. “As much as arguments against further rate hikes are getting stronger, the ECB simply cannot afford to be wrong about inflation. The bank wants and has to be sure that it has slayed the inflation dragon before considering a policy change. This is why they are putting more than usual emphasis on actual inflation developments.”
He said that while such a strategy supports the ECB’s credibility, by definition, it runs the risk of falling behind the curve. “Given the time lags with which monetary policy operates and affects the economy, central banks should be forward-looking, not now-looking. This is the theory. In practice, however, the ECB will not change its tightening stance until core inflation shows clear signs of a turning point.”
High inflation, especially at the core level, continues to embolden the bank’s hawks. The ECB raised its projections for euro area inflation excluding energy and food by half a percentage point for this year and the next to annual rates of 5.1% and 3.0% respectively. The staff also lifted the 2025 outlook a tenth to 2.3%.
Eurozone annual headline inflation fell to 6.1% in May, according to preliminary data from the European statistics office Eurostat, which is slated to release the final numbers Friday. The latest ECB forecasts for headline consumer price growth see it averaging 5.4% in 2023, an increase from the last forecast of 5.3% in March. Predictions of 3.0% in 2024 and 2.2% in 2025 were each one-tenth above the previous predictions.
Lagarde underpinned the bank’s current penchant for raising rates by saying that under current parameters, price growth of 2.2% in 2025 “is not satisfactory.” The bank’s inflation target is 2% over the medium term.
She laid part of the blame for the staying power of consumer price growth at the feet of European wage increases. “The persistency of inflation has a lot to do with the unit labour cost.” Lagarde added that she expects the Eurozone unemployment rate to decline to 6.3% from its current record low of 6.5%.
Following the announcement of the ECB rate hike and revisions to the outlook for growth and inflation, the euro moved higher against sterling and the greenback, with the yield on the 10-year Bund initially recording gains.
While Lagarde said the outlook for inflation and growth in the single-currency area was “highly uncertain”, there was enough certainty for staff to both raise inflation expectations and lower its growth forecasts. Bank economists said Eurozone GDP this year was expected to rise 0.9%, which was below the March estimate of 1.0%. The staff knocked a tenth of a point off next year’s projection to drop it to 1.5% and held the 2025 expectation at 1.6%.
The bank seemed pleased with the effects of previous monetary tightening. “Past rate increases are being transmitted forcefully to financing conditions and are gradually having an impact across the economy,” it said.
Furthermore, the bank confirmed that it will discontinue the reinvestments under the asset purchase programme (APP) as of July 2023.
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- Staff raises inflation forecasts, cuts growth outlook
- Higher interest rates being “transmitted forcefully”
- EUR shows gains against USD, GBP
- German 10-year bond yield improves
- Pause in hikes “not discussed”
By Eric Culp
European Editor, LiveSquawk News
@EricCulpLS
https://twitter.com/EricCulpLS
15 June 2023 | 14:50 GMT
FRANKFURT – The European Central Bank all but promised to increase its key interest rates by 25 basis points this week, and after delivering on Thursday, the public lender’s president told investors to expect another hike in six weeks time.
“Barring a material change to our baseline, it is very likely that we will continue to raise rates in July,” Christine Lagarde said at the press conference following Thursday’s rate decision.
And with that, the bank has jettisoned its strategy of tailoring monetary policy to the latest economic information, at least according to one analyst. “Here we go again from forward guidance to meeting-by-meeting to data dependent to pre-announcing the next rate hike,” tweeted Carsten Brzeski, head of macroeconomics at ING Bank.
This type of protean shifting is clearly off-putting for many, but the ECB Governing Council seems to be steadfastly hawkish, at least for the moment. And the reason for the bank’s eighth straight hike and the high likelihood of another increase in July is the numbers, according to Lagarde. “We looked very much at the data. That is the reason we increased all three rates. Are we done? Have we finished the journey? No. We are not at the destination.”
Pauses? We don’t need no stinking pauses
Lagarde pushed back on suggestions that the Eurozone’s lender of last resort might follow the lead of its American counterpart, the US Federal Reserve, and take a break from its current path of monetary tightening. The Fed left its interest rates unchanged less than 24 hours before the ECB decision, but pausing or skipping hikes is currently not a talking point in Frankfurt. “We have not discussed it all,” Lagarde said.
While the path seems clear – at least one more rate increase – it has also become treacherous, noted Brzeski. “As much as arguments against further rate hikes are getting stronger, the ECB simply cannot afford to be wrong about inflation. The bank wants and has to be sure that it has slayed the inflation dragon before considering a policy change. This is why they are putting more than usual emphasis on actual inflation developments.”
He said that while such a strategy supports the ECB’s credibility, by definition, it runs the risk of falling behind the curve. “Given the time lags with which monetary policy operates and affects the economy, central banks should be forward-looking, not now-looking. This is the theory. In practice, however, the ECB will not change its tightening stance until core inflation shows clear signs of a turning point.”
High inflation, especially at the core level, continues to embolden the bank’s hawks. The ECB raised its projections for euro area inflation excluding energy and food by half a percentage point for this year and the next to annual rates of 5.1% and 3.0% respectively. The staff also lifted the 2025 outlook a tenth to 2.3%.
Eurozone annual headline inflation fell to 6.1% in May, according to preliminary data from the European statistics office Eurostat, which is slated to release the final numbers Friday. The latest ECB forecasts for headline consumer price growth see it averaging 5.4% in 2023, an increase from the last forecast of 5.3% in March. Predictions of 3.0% in 2024 and 2.2% in 2025 were each one-tenth above the previous predictions.
Lagarde underpinned the bank’s current penchant for raising rates by saying that under current parameters, price growth of 2.2% in 2025 “is not satisfactory.” The bank’s inflation target is 2% over the medium term.
She laid part of the blame for the staying power of consumer price growth at the feet of European wage increases. “The persistency of inflation has a lot to do with the unit labour cost.” Lagarde added that she expects the Eurozone unemployment rate to decline to 6.3% from its current record low of 6.5%.
Following the announcement of the ECB rate hike and revisions to the outlook for growth and inflation, the euro moved higher against sterling and the greenback, with the yield on the 10-year Bund initially recording gains.
While Lagarde said the outlook for inflation and growth in the single-currency area was “highly uncertain”, there was enough certainty for staff to both raise inflation expectations and lower its growth forecasts. Bank economists said Eurozone GDP this year was expected to rise 0.9%, which was below the March estimate of 1.0%. The staff knocked a tenth of a point off next year’s projection to drop it to 1.5% and held the 2025 expectation at 1.6%.
The bank seemed pleased with the effects of previous monetary tightening. “Past rate increases are being transmitted forcefully to financing conditions and are gradually having an impact across the economy,” it said.
Furthermore, the bank confirmed that it will discontinue the reinvestments under the asset purchase programme (APP) as of July 2023.