LONDON (Reuters) -The European Central Bank raised interest rates for the eighth successive time, as expected, on Thursday and signalled further policy tightening, as it battles high inflation.
The central bank for the 20 countries that share the euro also said it expected inflation to stay above its 2% target through 2025 and hinted once again at more rate hikes in the coming months.
MARKET REACTION:
STOCKS: European stocks were down 0.6% on the day, compared with a 0.4% drop just before the ECB decision.
BONDS: Government bond yields retreated from the day’s highs, Germany’s two-year yield last up around 9 basis points at around 3.135%, versus 3.15% just before the rate decision.
FOREX: The euro rose by as much as 0.57% to a session peak at $1.0894, its highest since May 16 and was last trading up 0.5% on the day at $1.0887, versus $1.0828 before the hike.
COMMENTS:
ANNA STUPNYTSKA, GLOBAL MACRO ECONOMIST, FIDELITY INTERNATIONAL, LONDON:
“The main question going into this meeting was the ECB’s guidance on how much further they expect to raise rates from here. President Lagarde’s message on the next step was clear – the ECB is expecting to continue hiking rates in July ‘barring a material change to the baseline’.”
“While we view one more hike expected by markets as a more likely scenario, we believe risks to the terminal deposit rate of 3.75% are skewed to the upside, given significant uncertainty about the inflation process and the central bank’s focus on lagging data.”
MOHIT KUMAR, CHIEF EUROPEAN ECONOMIST, JEFFERIES, LONDON:
“The statement was on the hawkish side, with the ECB raising inflation projections for the 2023-25 period. More important, core inflation expectations were revised materially higher.”
“On the positive side, the ECB indicated that PEPP reinvestments will continue till at least end 2024, which will limit any negative fallout on peripheral spreads.”
SEBASTIAN VISMARA, GLOBAL MACRO ECONOMIST AND STRATEGIST, BNY MELLON INVESTMENT MANAGEMENT, LONDON:
“The euro is appreciating and short rates have moved higher so there’s a bit more hawkishness in the front end of the curve. The market is interpreting this as hawkish, not necessarily the hike itself, but what it’s communicating in terms of the outlook.
“It’s another central bank that is surprising hawkishly after the RBA, BoC and Fed. They’re all pointing to the fact that inflation is not moving down at the speed they would like, so there’s a little bit more to do.”
COLIN ASHER, SENIOR ECONOMIST AT MIZUHO, LONDON:
“The surprise is the revision up in the inflation forecasts, which were higher across the board, but they’ve especially increased their core CPI forecast for next year. They are clearly more concerned that inflation will take a longer time to come down.”
“The forecasts were more hawkish than expected. Market pricing was already looking for a hike at the late July meeting and now there will be question marks about the meeting after that as well, but it’s not a huge surprise in terms of the 25 bps hike, which was expected.”
BAS VAN GEFFEN, SENIOR MACRO STRATEGIST, RABOBANK, NETHERLANDS:
“We’ve seen a decision that has actually been fully in line with expectations. The 25-basis-point hike is not a surprise.”
“We are seeing quite a big market response, which does seem to be mostly related to the inflation projections being increased across the board and that is a signal to the markets that policy might either have to go higher than markets were anticipating or that the ECB will have to keep their policy rates at the peak level for much longer than the market is currently pricing in.”
CARSTEN BRZESKI, GLOBAL HEAD OF MACRO, ING, FRANKFURT:
“The fact that the ECB’s newest staff projections include an upward revision of both headline and core inflation across the entire time horizon must have strengthened the case for continued hiking.”
“Still, with the Federal Reserve’s hawkish pause and a eurozone economy not only turning out to be less resilient than anticipated but also facing a very subdued growth outlook, the ECB is increasingly taking the risk of worsening the economic outlook.”
NATHANIEL CASEY, INVESTMENT STRATEGIST, EVELYN PARTNER, LONDON:
“The decision to raise the deposit rate by 25 bps came as no surprise to markets as preceding rhetoric from policy makers outlined that ‘we have not reached the end of the rate-hike cycle’ yet.”
“Although there is likely to be at least one more rate hike to come, we’re seeing signs that the ECB is getting closer to the end of its tightening cycle.”
PIET HAINES CHRISTIANSEN, CHIEF STRATEGIST FOR THE ECB, DANSKE BANK, COPENHAGEN:
“Clearly ‘inflation has been coming down but is projected to remain too high for too long.’ This is an acknowledgment of recent developments but also a concern for the inflation outlook.”
IPEK OZKARDESKAYA, SENIOR MARKET ANALYST, SWISSQUOTE BANK, SWITZERLAND:
“No surprise, the ECB was broadly expected to raise rates by 25 bps today. Devil will be in the press conference: will the ECB keep its hawkish stance despite easing inflation and deteriorating economic outlook, or will the bank soften its hand?”
“For now, we expect another 25bp hike in July before a pause in ECB tightening. This is in line with the hawkish moves and actions from the other major central banks.”
STUART COLE, CHIEF MACRO ECONOMIST, EQUITI CAPITAL, LONDON:
“It was fully expected, given that (ECB chief Christine) Lagarde had already said a couple of weeks ago that interest rates needed to be raised further to bring CPI back to target.”
“The real story for me is that the outlook for inflation was revised upwards too. Yes, the revisions are small, but they do suggest that we will see further rate rises before the ECB is willing to pause.”
ARNE PETIMEZAS, SENIOR ANALYST, AFS GROUP, AMSTERDAM
“Mixed statement: ECB acknowledges ‘tentative’ improvement in core inflation and sees proof of monetary tightening cooling economy and prices gradually. On the other hand, ECB staff raised core inflation forecasts. The latter could explain why yields extended increases post-ECB. There is no interest rate guidance in the statement, except the generic statement that the ECB will review its stance at each meeting.”
“The market reaction is overblown and that yields should move off the highs. Given the positive inflation and producer price surprise and the monetary slowdown, the ECB will do one more rate hike. They can’t take a third rate hike off the table though, because something close to a majority wants optionality with regards to a third hike. Hence, the hawkish market response after the Fed wake-up call.”
(Reporting by the markets team; Editiing by Dhara Ranasinghe)
