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 show «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.»
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 Bundesbank tightening cycles in the 70s and the 80s.
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 the 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.
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