In a decision that economists said was too close to call, it looks like ongoing concerns about Eurozone inflation trumped reports of flagging economic growth in the currency area.
The European Central Bank raised interest rates for the 10th time since starting the tightening cycle over a year ago, and Thursday’s increase could be the last, according to a statement from the public lender. “Based on its current assessment, the governing council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”
But ECB President Christine Lagarde was quick to note that the bank cannot say rates have reached their peak, repeating that officials will remain “data-dependent” when considering the next steps for monetary policy.
The latest move comes as headline and core consumer price growth in the euro area remain more than double the bank’s target of 2% over the medium turn, with the preliminary August data show both rates at 5.3%.
The ECB's latest predictions (blue) versus the June forecasts.
The ECB was forced to upwardly revise its inflation projections for the current year and 2024, a likely reason for Thursday’s announcement of yet another increase after officials suggested in July that they could pause the hike cycle this month. The move also came as the bank announced cuts to its economic growth expectations for the current and coming year.
According to the bank’s charter, its only goal is to tame consumer price growth, and this apparently won out over growth concerns, with ECB President Christine Lagarde saying, “Inflation continues to decline, but is still expected to remain too high for too long.”
The market was split on whether the bank would raise or hold rates this time around, but a Reuters report the day before the decision said the ECB staff had raised their inflation projections, which many considered reason enough to tip the scales in favour of a hike.
“We had a lot of data, a lot of analysis done by staff,” Lagarde said, noting that the bank’s governing council spent the majority of Wednesday, the initial day of the two-day monetary policy meeting, poring through reports. But at the end of Thursday’s morning session, not everyone was on board. ”Obviously some members did not come to the same conclusion” that a rate hike was required, she explained, noting that a “solid majority” backed the move.
“I don’t want you to believe that we had an antagonistic and adversarial discussion,” she said.
Watch and wait
Many observers predicted that it was pretty much 10 and done for the bank, the 10 being the total number of hikes since July of last year. “The ECB’s decision to raise interest rates by a further 25 basis points today probably brings the current tightening cycle to an end,” Capital Economics said. “But given the strength of underlying inflation, we expect rates to remain at this level for at least a year even though the economy seems to be heading for a recession.”
TD Securities called the move a dovish hike. “Markets are rejoicing at the end of the hiking cycle. Ten-year Bund yields rallied by 6-7bps.”
Writing on X, Marchel Fratzscher, the head of Germany’s DIW economics institute, said: “The ECB governing council wants to show its toughness with their decision and increase their own credibility. This is understandable, and risky.”
The move comes at time when the Eurozone is suffering what Lagarde called “sluggish” growth. Bank staff cut their GDP growth forecast for this year to 0.7% from the 0.9% announced in June and slashed the projection for next year to 1.0% from the 1.5% mid-year estimate.
“We are confident that growth will pick up in 2024,” she said, noting that the current economic weakness would bleed into next year and slow the expected recovery.
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- 25bp increase follows worsening inflation outlook
- Is it 10 and done?
- Staff projections cut growth expectations
- “Solid majority” backed increase
- Eurozone recovery delayed until 2024
By Eric Culp
European Editor, LiveSquawk News
@EricCulpLS
14 September 2023 | 16:30 GMT
In a decision that economists said was too close to call, it looks like ongoing concerns about Eurozone inflation trumped reports of flagging economic growth in the currency area.
The European Central Bank raised interest rates for the 10th time since starting the tightening cycle over a year ago, and Thursday’s increase could be the last, according to a statement from the public lender. “Based on its current assessment, the governing council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”
But ECB President Christine Lagarde was quick to note that the bank cannot say rates have reached their peak, repeating that officials will remain “data-dependent” when considering the next steps for monetary policy.
The latest move comes as headline and core consumer price growth in the euro area remain more than double the bank’s target of 2% over the medium turn, with the preliminary August data show both rates at 5.3%.
The ECB was forced to upwardly revise its inflation projections for the current year and 2024, a likely reason for Thursday’s announcement of yet another increase after officials suggested in July that they could pause the hike cycle this month. The move also came as the bank announced cuts to its economic growth expectations for the current and coming year.
According to the bank’s charter, its only goal is to tame consumer price growth, and this apparently won out over growth concerns, with ECB President Christine Lagarde saying, “Inflation continues to decline, but is still expected to remain too high for too long.”
The market was split on whether the bank would raise or hold rates this time around, but a Reuters report the day before the decision said the ECB staff had raised their inflation projections, which many considered reason enough to tip the scales in favour of a hike.
“We had a lot of data, a lot of analysis done by staff,” Lagarde said, noting that the bank’s governing council spent the majority of Wednesday, the initial day of the two-day monetary policy meeting, poring through reports. But at the end of Thursday’s morning session, not everyone was on board. ”Obviously some members did not come to the same conclusion” that a rate hike was required, she explained, noting that a “solid majority” backed the move.
“I don’t want you to believe that we had an antagonistic and adversarial discussion,” she said.
Watch and wait
Many observers predicted that it was pretty much 10 and done for the bank, the 10 being the total number of hikes since July of last year. “The ECB’s decision to raise interest rates by a further 25 basis points today probably brings the current tightening cycle to an end,” Capital Economics said. “But given the strength of underlying inflation, we expect rates to remain at this level for at least a year even though the economy seems to be heading for a recession.”
TD Securities called the move a dovish hike. “Markets are rejoicing at the end of the hiking cycle. Ten-year Bund yields rallied by 6-7bps.”
Writing on X, Marchel Fratzscher, the head of Germany’s DIW economics institute, said: “The ECB governing council wants to show its toughness with their decision and increase their own credibility. This is understandable, and risky.”
The move comes at time when the Eurozone is suffering what Lagarde called “sluggish” growth. Bank staff cut their GDP growth forecast for this year to 0.7% from the 0.9% announced in June and slashed the projection for next year to 1.0% from the 1.5% mid-year estimate.
“We are confident that growth will pick up in 2024,” she said, noting that the current economic weakness would bleed into next year and slow the expected recovery.