The European Central Bank on Thursday began to slow down its pace of rate hikes, announcing an increase of 25 basis points following seven back-to-back increases of 50 basis points. The ECB said that underlying price pressures in the 20 Eurozone countries remain strong.
“The inflation outlook continues to be too high for too long,” said ECB president Christine Lagarde at a press conference. “Headline inflation has declined over recent months, but underlying price pressures remain strong. At the same time, our past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain.”
Although some fixed-income analysts and economists had expected another 50 basis point increase, most had anticipated the rise of 25 basis points announced on Thursday. Lagarde said that the governing council had shown “near unanimous support” for today’s decision.
“There was a general, very strong consensus behind the decision that is in front of you,” said Lagarde. “This is a journey. We have not arrived yet.”
ECB does not want risk overdoing it
Katharine Neiss, chief European economist at PGIM Fixed Income was not surprised to see the ECB step down in the pace of interest rate increases while retaining a hawkish tone with regards to too-high inflation. “The increase in rates reflects the fact that inflation remains uncomfortably high. By way of contrast with the US Federal Reserve, the ECB ‘are not pausing’,” she said. The step-down also shows that “the ECB does not want to risk overdoing it.”
Frederik Ducrozet, head of macro research at Pictet Wealth Management, noted that the current ECB rate hike cycle is the fastest in the history of the ECB, second only to the Bundesbank tightening cycles during the 1970s and the 1980s.
Fastest ECB cycle in history
Lagarde said that the ECB believes that there still are upside risks to inflation, referring among others to Russia’s war against Ukraine, which could push up prices of energy and food, and recently agreed increases in workers’ salaries under collective labour contracts.
The ECB on Thursday also said that its governing council decided to continue to reduce its asset purchase programme, known as APP, “at a measured and predictable pace”. The ECB expects it will discontinue the reinvestments under the APP from July of this year. Under the current APP programme, the ECB is expected to inject another 27 billion euro per month during April and May.
PGIM’s Neiss said that expectation that the ECB will discontinue the reinvestments under its asset purchase programme as of this coming July. was perhaps more notable than the rate decision. “This is a somewhat faster pace than suggested by the ECB’s latest survey of market participants. Our view is that, while the impact of balance sheet runoff is likely to be marginal relative to the increase in interest rates, it is contributing to tighter financial conditions and should help cool the economy to bring inflation back to target.”
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