(Finance) – No surprises on the extent of the increase in the cost of money implemented today by Frankfurt. As largely discounted by markets and analyststhe Governing Council of the ECB has in fact raised official rates by 25 basis points: the rate on deposits with the ECB, the rate on main refinancing operations and the marginal lending rate rose to 3.50%, 4.0% and 4.25% respectively. More interesting were instead the indications on forward guidance and the words of the president Christine Lagarde during the press conference.
“The ECB’s latest interest rate decision and confirmation of faster balance sheet reduction are in line with expectations,” said Katharine Neiss, chief European economist at PGIM Fixed Income. the updated staff projections and the language of the statement of monetary policy suggest a decidedly more aggressive monetary policy perspective expected. GDP growth projections have been revised downwards, but only slightly, given the weaker data flow. Most importantly, inflation forecasts have been revised upwards for each year, including 2025, which the ECB now sees at 2.2% – thus above the ECB’s target.”
Responding to journalists’ questions, Lagarde said that the ECB will most likely continue to raise rates at its next meeting in July and that he’s not thinking about a break in its course of tightening.
“The ECB hasn’t missed a beat in its rate-hiking cycle, with a further 0.25% hike taking the deposit rate to 3.5%,” said Felix Feather, European economic analyst at abrdn. on the one hand, the ECB continues to stress its dependence on data, on the other, President Lagarde has suggested that a rate hike will also be very likely in July.We think this hike will be the last of the cycle, given the decrease in inflation. But the wage growth rate is still very high, so it is likely that there may be an increase also in September“.
Questions also touched on market expectations and the terminal rateon the Lagarde, preferred not to answer, reiterating that the point of arrival is the return of inflation to 2%.
As for the next moves, “Lagarde made the July rise quite explicit, unless there is a substantial change in the macro picture, after which she indicated that the subsequent moves will depend on the data – noted Antonella Manganelli, CEO and Investment Manager of Payden & Rygel Italy – It can therefore be deduced that at this moment the ECB does not want to contradict market expectations on a terminal rate of 3.75-4%. On the other hand, no comment on the size of the budget and on the PEPP; we think this could become a topic of conversation once the terminal rate is reached.”
As much as the arguments against further rate hikes are strengthening, the ECB it cannot afford to be wrong about inflation and to convey the wrong messages to the markets.
“Similar to the Fed yesterday, it seems clear that the ECB wants avoid at all costs the risk that a tone is perceived as insufficiently hawkish could lead to too early an easing of financial conditions,” commented Alvaro Sanmartín, Chief Economist of Amchor IS.
“To achieve this goal – he added – today it has done several things besides raise rates: to say that they are very likely to be raised again in July; don’t rule out further hikes – Lagarde said they haven’t thought about a break yet; revise upwards the inflation forecasts for 2025 to 2.2% – a message to operators, not only that there will still be some increases but, above all, that rates will take a long time to fall; make repeated reference to the strength of the labor market and the need to follow the evolution of wages – repeatedly referring to the unit labor cost as a key variable for the future evolution of prices”.