Following hotly on the heels of the US Federal Reserve and the Bank of England, the European Central Bank, tightened monetary policy again on Thursday, as it continued to fight inflationary pressures across the euro area.
In a widely anticipated move, the bank raised its three key lending rates by 50 basis points, which will bring the benchmark refinancing rate to 3.0%, the deposit facility rate to 2.5%, and the marginal lending rate to 3.25%.
In addition to the rate announcement, the bank detailed plans or ‘modalities’ for the reduction of the Eurosystem’s holdings of securities under its asset purchase programme. As stated in December, the central bank will slim its portfolio at a rate of EUR 15 bln per month on average until the end of June.
As is the way, more detail of the Governing Council’s machinations is revealed by sources stories in the media than by ECB President Christine Lagarde during the press conference. Post event, Reuters ran a story reporting that policymakers foresaw at least two more rate hikes or 25 or 50 basis point increments. The newswire stated that two members said that it was clear that rates would be increased again at the ECB's following meeting in May, “although the Governing Council had not discussed the size of that raise on Thursday.”
Dankse Bank’s Piet Haines Christiansen posited that “For the ECB, the brighter near-term economic outlook remains a double-edged sword, as it risks prolonging inflationary pressures. Energy inflation has slowed faster than expected, but underlying inflation remains high.”
Investors take lower rate road
Markets have generally ignored hawkish rhetoric from central banks over the past few days with investors appearing ambivalent to the ECB's promise to “stay the course in raising rates significantly at a steady pace.” At the time of writing, interest rate futures have priced the current cycle peak at 3.4%, ~10 bps lower than the day before.
SocGen’s Anatoli Annenkov appeared unimpressed. “On the back of the markets’ dovish reading of the Fed and the Bank of England this week, the ECB today did little to prevent another dovish reading of its future actions. Given the state of the economy and still material upside risks to core inflation, we would have expected a more hawkish message, and now see a risk that the ECB may be adding uncertainty and volatility to the markets.”
Slow growth, stubborn inflation
Reading from the statement, Largarde said keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations.
On Tuesday, data from the euro area suggested the bloc had entered a period of stagflation. The EU statistics office Eurostat said euro area GDP last quarter grew 0.1% from the previous three months. Analysts had expected a 0% reading following quarterly growth of 0.3% in the July-September period.
The S&P Global flash composite Eurozone PMI reading for January reflected a less gloomy outlook for activity across the euro area. The Survey author said “The start of 2023 saw eurozone business activity rise marginally, showing a tentative return to growth after six successive months of decline.
“Input cost inflation meanwhile cooled further thanks to alleviating supply chain stress, but average selling price inflation for both goods and services ticked higher, reflecting still-elevated cost growth and upward wage pressures.
All of these will feed into rate setters’ assumptions ahead of the next meeting in March alongside new staff projections.
"While markets are still pricing a terminal rate above 3%, long-term interest rates are lower than they were in December, something we expected would lead to continued hawkishness by Lagarde, especially given the reduced risks of recession in Europe,” Annenkov Opined. “If the market reaction were in line with ECB intentions, this could suggest that the Governing Council currently is more concerned about the growth outlook than inflation.”
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- Rate moves in-line with forecasts
- ECB says more increases coming
- Governing Council vows to stay the course
- Policymakers see at least two more rate hikes
By Harry Daniels
LiveSquawk News
@HarryDaniels71
02 February 2023 | 17:30 GMT
Following hotly on the heels of the US Federal Reserve and the Bank of England, the European Central Bank, tightened monetary policy again on Thursday, as it continued to fight inflationary pressures across the euro area.
In a widely anticipated move, the bank raised its three key lending rates by 50 basis points, which will bring the benchmark refinancing rate to 3.0%, the deposit facility rate to 2.5%, and the marginal lending rate to 3.25%.
In addition to the rate announcement, the bank detailed plans or ‘modalities’ for the reduction of the Eurosystem’s holdings of securities under its asset purchase programme. As stated in December, the central bank will slim its portfolio at a rate of EUR 15 bln per month on average until the end of June.
As is the way, more detail of the Governing Council’s machinations is revealed by sources stories in the media than by ECB President Christine Lagarde during the press conference. Post event, Reuters ran a story reporting that policymakers foresaw at least two more rate hikes or 25 or 50 basis point increments. The newswire stated that two members said that it was clear that rates would be increased again at the ECB's following meeting in May, “although the Governing Council had not discussed the size of that raise on Thursday.”
Dankse Bank’s Piet Haines Christiansen posited that “For the ECB, the brighter near-term economic outlook remains a double-edged sword, as it risks prolonging inflationary pressures. Energy inflation has slowed faster than expected, but underlying inflation remains high.”
Markets have generally ignored hawkish rhetoric from central banks over the past few days with investors appearing ambivalent to the ECB's promise to “stay the course in raising rates significantly at a steady pace.” At the time of writing, interest rate futures have priced the current cycle peak at 3.4%, ~10 bps lower than the day before.
SocGen’s Anatoli Annenkov appeared unimpressed. “On the back of the markets’ dovish reading of the Fed and the Bank of England this week, the ECB today did little to prevent another dovish reading of its future actions. Given the state of the economy and still material upside risks to core inflation, we would have expected a more hawkish message, and now see a risk that the ECB may be adding uncertainty and volatility to the markets.”
Reading from the statement, Largarde said keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations.
On Tuesday, data from the euro area suggested the bloc had entered a period of stagflation. The EU statistics office Eurostat said euro area GDP last quarter grew 0.1% from the previous three months. Analysts had expected a 0% reading following quarterly growth of 0.3% in the July-September period.
A day later, Eurostat reported a welcome fall in headline inflation countered by a sticky core reading.
The S&P Global flash composite Eurozone PMI reading for January reflected a less gloomy outlook for activity across the euro area. The Survey author said “The start of 2023 saw eurozone business activity rise marginally, showing a tentative return to growth after six successive months of decline.
“Input cost inflation meanwhile cooled further thanks to alleviating supply chain stress, but average selling price inflation for both goods and services ticked higher, reflecting still-elevated cost growth and upward wage pressures.
All of these will feed into rate setters’ assumptions ahead of the next meeting in March alongside new staff projections.
"While markets are still pricing a terminal rate above 3%, long-term interest rates are lower than they were in December, something we expected would lead to continued hawkishness by Lagarde, especially given the reduced risks of recession in Europe,” Annenkov Opined. “If the market reaction were in line with ECB intentions, this could suggest that the Governing Council currently is more concerned about the growth outlook than inflation.”