The European Central Bank as expected announced a 75-basis-point interest rate hike on Thursday. It is the third consecutive increase this year. The move came as no surprise to markets.
The central bank updated its wording of the forward guidance, indicating that further tightening is to be expected, but will be done on a meeting-by-meeting basis. At the press conference, following the board meeting, President Lagarde elaborated on the time lag between monetary policy decisions and the subsequent effects on economic data.
M&G
Gareth Jandrell, bond specialist at UK-based M&G, said in his analysis: “Despite another 75 basis point increase, today’s ECB meeting was clearly more cautious than the previous two meetings in July and September, where there was a real sense of urgency. President Lagarde stressed that «significant progress» had been made on interest rate hikes and the statement deleted the phrase «in upcoming meetings», which was central bank talk before the pace of interest rate hikes will slow down. There was also a clear acknowledgement of the deteriorating growth outlook, which seemed to overshadow rising inflationary pressures.”
“Not surprisingly, markets took today’s meeting as a dovish pivot. I think there is a real danger of the ECB becoming too accommodative too soon and undoing the work the ECB has done so far to tighten financial conditions. This in turn could mean longer hikes, prolonging the interest rate cycle.”
BlackRock
The ECB announced no decisions on the prospect of quantitative tightening, leaving existing asset purchase and pandemic emergency purchase programmes unchanged. Interestingly, it did reveal changes to interest rates for its targeted longer-term refinancing operations, known as TLTRO III, and that minimum reserves held by credit institutions will be subject to deposit rates rather than refinancing rates. Lagarde noted that these measures are intended to release collateral and reduce liquidity, BlackRock commented in a note.
DWS
Ulrike Kastens, economist Europe at DWS, expects the central bank will raise interest rates again in December by at least 50 basis points. “The ECB responded to the high inflation figures with another big interest rate hike. Although a eurozone recession is imminent, the high inflation figures - including in 2023 - make more big interest rate hikes necessary, which will have to go beyond the neutral interest rate level of around 2 per cent.”
Karstens noted that ECB President Lagarde avoided a discussion on neutral interest rates during the press conference. “However, given high inflation, she did not rule out the possibility that the central bank will have to raise the key interest rate above a neutral interest rate level to regain the ECB›s inflation target. In contrast, no statements were made about the size of the next interest rate step in December 2022. This will largely depend on the depth of the economic downturn. However, it is likely to be at least 50 basis points.”
Fed set for 4th 75bp hike
The US Federal Reserve will update its monetary policy next week. With inflation remaining significantly above the central bank’s 2 percent target and the labour market robust, market participants agree that the Fed will continue its aggressive tightening path with a fourth consecutive 75-basis-point increase in the federal interest rate.