MILANO – The European Central Bank proceeds as planned in its anti-inflation monetary tightening. As expected on the eve of the board of Bce it raised rates by a further 50 points, bringing the rate on major refinancing to 3%, that on deposits to 2.50%, and that on marginal loans to 3.25%. But more importantly, the board has already given indications for a new increase of 50 points in the March meeting.
“The Governing Council will stay on course in continuing to increase interest rates significantly at a steady pace and in keeping them at levels restrictive enough to ensure a timely return of inflation to its 2% target over the medium term,” the Governing Council clarified. president Christine Lagarde, in the press conference following the rate announcement. He then specified that, after the new rise of 50 points in March, he will reassess the situation. And in any case “there was general agreement” on the increases of 50 points and the same in March “which were legitimized by the underlying inflationary pressure which we know will continue. There was a discussion and not full agreement on how we communicate but there was a very broad consensus on the policy statement.”
“In the light of underlying inflationary pressures”, the Governing Council of the ECB intends to raise interest rates by another 50 basis points at the next monetary policy meeting in March, to then “evaluate the subsequent evolution of its monetary policy”, it was anticipated in the note released by Eurotower at the end of the meeting. “Keeping interest rates at restrictive levels,” the statement remarked, “will bring inflation down over time by curbing demand and will also protect against the risk of a persistent rise in inflation expectations. In any case, even in the future the Governing Council’s decisions on key rates will be data-driven and will reflect an approach whereby such decisions are made on a case-by-case basis at each meeting.”
This is a factor in the decisions driven by the data, also reiterated by Lagarde. And the latest data confirmed that the eurozone economy “has slowed markedly since mid-2022 and we expect it to remain weak in the near term”. But, Lagarde conceded, “overall she’s been more resilient than expected.” Price pressure, however, “remains strong”.
Lagarde’s hard punch, but the market doesn’t believe it
The path indicated by the ECB therefore still seems to have a tough fist against inflation, unlike that of the Fed which is softening (yesterday it raised rates by ‘only’ 25 points) as well as the BoE. If in these last two cases it seems that the trajectory of rates is close to the peak, it must however be considered that the ECB has reached 2.5% with the fifth hike in a row, the highest since 2008, but remains below 4, 5-4.75% of the US Central Bank and 4% of the BoE. And, as Lagarde remarked, the point regarding the trajectory of prices is also different: “There is still no disinflation process. If we look at core inflation (net of food and energy, ed), we were at 5% in November, we rose to 5.2% in December and we are still at 5.2%, the all-time high”, recalled the president, explaining the reasons why the euro area cannot be said to be in the same situation as the USA, where yesterday the Fed spoke of signs of “disinflation”.
On the markets, this hard punch has not caused any upheavals and also European stock exchanges have started to run. According to Fitch, “interest rates will end this cycle 100 basis points above where they are today.” Government bonds also do well, with the BTP slowing down to below 4% yield and the spread narrowing by more than 10 basis points below 190 points. As a note Bloomberg, if on the one hand the markets price another 100 points of increases on the other they have cut the forecasts of the peak of the restrictive cycle with a rate below 3.5%. “It is clear that the market was positioned for an ECB hawkish” or with hawkish plumage, signaled by Candriam. And “despite explicitly hawkish statements by the central bank, with a return to forward guidance (despite it being thought to have been abandoned) and the “intention” to make another hike from 50 basis points in March, we saw a strong bond rally” as if to say investors don’t “believe it can stay that way (hawk, ndr) for a long time”. Abn Amro hypothesizes that the one in March will be the last increase, noting that in the press conference Lagarde said that with the +50 points at the time, the ECB will have achieved the guidance indicated in December, in addition to the fact which now sees inflation-related risks “more balanced” while they were tilted to the upside in December.
In addition to the rates, the ECB – notes Paul Diggle of Abrdn – gave further details on the functioning of the Quantitative Tightening, i.e. the reduction of the balance sheet. Eurotower “will reduce its balance sheet by €15 billion per month, or about half the portfolio’s natural maturation rate. Partial reinvestments will then continue, with a particular focus on corporate bond reinvestments” towards broadcasters with better climate performance“. This small detail could be the most important part of today’s decision, because it is the first concrete step in using the ECB’s budget to promote climate goals.”
