The European Central Bank has raised rates by a quarter of a percentage point, in a hike that its president Christine Lagarde signaled was unlikely to be the last.
The current rise to 3.25%-4% means the bank has now raised interest rates by 3.75 percentage points in the past year, after the eight-year-long spell in which deposit rates were negative.
“This is by far, the most aggressive monetary policy tightening cycle since the start of the monetary union,” said Carsten Brzeski global head of macro at ING.
The ECB will hope the hike helps bring inflation down to the 2% target, as price rises have proven more stubborn than initially expected. Last week, headline Eurozone inflation surprisingly rose to 7.0%, while core inflation - removing food and energy prices - dipped only slightly, to 5.6%.
The ECB followed the US Federal Reserve, which raised interest rates by a quarter point yesterday. But while Fed chair Jerome Powell’s comments suggested the US central bank planned to pause its hikes amid the threat of banking instability, investors in Europe did not get the same relief.
While the initial statement accompanying the hike offered little in the way of singals for future meetings, Lagarde said in a press conference that “we are not pausing”.
“We know we have more ground to cover,” she said.
It said it would “continue to follow a data-dependent approach” on future rises.
Looking further ahead, many investors believe rates could decline again by the end of the year. But Geoff Yu, FX and macro strategist for EMEA at BNY Mellon Group, said this was too optimistic.
“In our view, market hopes for early easing by the ECB – as early as this December – appear optimistic,” he said. “Considering the ECB’s narrower price mandate, cutting rates this year would be inconsistent with current market expectations of full-year headline and core inflation at 2.5% and 2.7%, respectively, in 2024.
“Perhaps more worrying for the ECB is that the risk of inflation expectations becoming unanchored has not gone away. Inflation expectations over the next 12 months have fallen sharply through Q1, but to levels that remain too high for comfort.
“Furthermore, there has been a pick-up in three-year forward inflation expectations for the first time in four months; this must have come as a surprise considering the amount of domestic and global tightening taking place.”
