FRANKFURT – It still appears to be all about consumer price growth at European Central Bank headquarters here in Germany’s financial capital, which means unless inflation plunges, more rate hikes are coming.
At least that’s the word from ECB President Christine Lagarde, who said the results of the latest two-day meeting of the bank’s governing council were clear: “Given our baseline…our judgement in the room is that we are not pausing – that applies today. We believe we have more ground to cover.”
Speaking at the traditional press conference following bank’s monetary policy announcement, She said the ECB will continue to use economic data to guide its strategy, and decisions will be made on a “meeting-by-meeting basis.”
Following the ECB’s move to further increase borrowing costs, markets priced in two more quarter-point rate hikes in the months ahead.
EUR/USD shed more than a half cent as the market digested the decision and the bank’s comments and flirted with a 1.09 handle during Lagarde’s comments.
Blinkers on
Thursday’s statement from the bank about the 25-basis point hikes for its key interest rates – the seventh straight increase – led with, “The inflation outlook continues to be too high for too long,” a nearly verbatim reiteration of the opening comment six weeks ago. Except back then, the bank said inflation was only “projected” to be unacceptably strong for an unwanted duration. Then it rose in April.
A quarter-point rate increase seemed like the smart bet following last week’s announcement of flagging Q1 Eurozone growth and Tuesday’s report of a surprise increase in headline inflation last month, with the core rate of consumer price growth barely slipping from its all-time high. Most analysts who felt they needed to stick to their pre-data guns and reiterate their forecast for a 50-basis point increase added caveats suggesting that even if the latest numbers only supported the smaller move, the situation was so dire that rate-setters had no other choice but to go the whole, well half, hog.
It wasn’t a bad call to forecast the bigger move despite the growth and inflation reports. In March, ECB policymakers seemingly ignored the treacherous tremblors then emanating from the banking system with the failure of US-based regional lender Silicon Valley Bank in the run up to the rate decision. Council members stuck with a robust 50bp hike announced just days before euro area neighbour Switzerland intervened to save one local bank by making it merge with another.
Any concerns about a global financial meltdown – which at the time often seemed overblown – were handily trumped by ongoing consumer price growth, according to the bank, and that appears to still be the case, with Vice-President Luis de Guindos noting Thursday during the press conference that Europe does not have the same concerns about the sector as the US. Lately, regional bank failures seem to be a fortnightly event on the other side of the Atlantic.
Closing in on the terminal rate?
Lagarde said underlying pride pressures remain “strong” for its key metric of inflation, and she noted that transmission of monetary policy is another focus of decision-makers.
While the ECB’s seven consecutive rate increases still haven’t fully resulted in the preferred outcomes, she said private lenders have reacted favourably to moves. Lagarde noted that the ECB’s latest bank lending survey said the demand from corporates “is really, really down.” This is a signal that ECB policy is working, she explained, and it also indicates that interest rates are to some extent already in restrictive territory.
Additionally, the bank said it expects to discontinue reinvestments under the Asset Purchase Programme (APP) as of July 2023. Lagarde explained that the announcement was not part of any deal between those council members demanding a bigger hike and those pushing for the quarter-point move.
“Together, the decision today is a ‘hawkish 25bps’, even if the mix of details around the hike wasn't quite what we had expected,” TD Securities said. “But the tone is one of a governing council that intends to hike more if required and made that explicitly clear during the press conference.”
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- EUR/USD slides, flirts with 1.09 handle
- Traders forecast two more 25bp rate increases
- Underlying price pressure “strong”
- Policy transmission effective at corporate level
By Eric Culp
European Editor, LiveSquawk News
@EricCulpLS
4 May 2023 | 14:45 GMT
FRANKFURT – It still appears to be all about consumer price growth at European Central Bank headquarters here in Germany’s financial capital, which means unless inflation plunges, more rate hikes are coming.
At least that’s the word from ECB President Christine Lagarde, who said the results of the latest two-day meeting of the bank’s governing council were clear: “Given our baseline…our judgement in the room is that we are not pausing – that applies today. We believe we have more ground to cover.”
Speaking at the traditional press conference following bank’s monetary policy announcement, She said the ECB will continue to use economic data to guide its strategy, and decisions will be made on a “meeting-by-meeting basis.”
Following the ECB’s move to further increase borrowing costs, markets priced in two more quarter-point rate hikes in the months ahead.
EUR/USD shed more than a half cent as the market digested the decision and the bank’s comments and flirted with a 1.09 handle during Lagarde’s comments.
Blinkers on
Thursday’s statement from the bank about the 25-basis point hikes for its key interest rates – the seventh straight increase – led with, “The inflation outlook continues to be too high for too long,” a nearly verbatim reiteration of the opening comment six weeks ago. Except back then, the bank said inflation was only “projected” to be unacceptably strong for an unwanted duration. Then it rose in April.
A quarter-point rate increase seemed like the smart bet following last week’s announcement of flagging Q1 Eurozone growth and Tuesday’s report of a surprise increase in headline inflation last month, with the core rate of consumer price growth barely slipping from its all-time high. Most analysts who felt they needed to stick to their pre-data guns and reiterate their forecast for a 50-basis point increase added caveats suggesting that even if the latest numbers only supported the smaller move, the situation was so dire that rate-setters had no other choice but to go the whole, well half, hog.
It wasn’t a bad call to forecast the bigger move despite the growth and inflation reports. In March, ECB policymakers seemingly ignored the treacherous tremblors then emanating from the banking system with the failure of US-based regional lender Silicon Valley Bank in the run up to the rate decision. Council members stuck with a robust 50bp hike announced just days before euro area neighbour Switzerland intervened to save one local bank by making it merge with another.
Any concerns about a global financial meltdown – which at the time often seemed overblown – were handily trumped by ongoing consumer price growth, according to the bank, and that appears to still be the case, with Vice-President Luis de Guindos noting Thursday during the press conference that Europe does not have the same concerns about the sector as the US. Lately, regional bank failures seem to be a fortnightly event on the other side of the Atlantic.
Closing in on the terminal rate?
Lagarde said underlying pride pressures remain “strong” for its key metric of inflation, and she noted that transmission of monetary policy is another focus of decision-makers.
While the ECB’s seven consecutive rate increases still haven’t fully resulted in the preferred outcomes, she said private lenders have reacted favourably to moves. Lagarde noted that the ECB’s latest bank lending survey said the demand from corporates “is really, really down.” This is a signal that ECB policy is working, she explained, and it also indicates that interest rates are to some extent already in restrictive territory.
Additionally, the bank said it expects to discontinue reinvestments under the Asset Purchase Programme (APP) as of July 2023. Lagarde explained that the announcement was not part of any deal between those council members demanding a bigger hike and those pushing for the quarter-point move.
“Together, the decision today is a ‘hawkish 25bps’, even if the mix of details around the hike wasn't quite what we had expected,” TD Securities said. “But the tone is one of a governing council that intends to hike more if required and made that explicitly clear during the press conference.”