- The European Central Bank has raised rates by 25 bps, signaling more to come.
- Upwardly revised inflation forecasts show more policy tightening needs to be done.
- ECB President Lagarde's focus on labor costs adds to Euro strength.
Hawks are everywhere – with the last ones spotted in Frankfurt. Each central bank is taking turns in conveying a tough message against inflation, and it is the Euro's turn to benefit. The European Central Bank has not only raised interest rates – while the Federal Reserve (Fed) paused – but also included three hawkish moves. These promise further Euro gains.
First, ECB staff lifted its inflation forecasts substantially in comparison to the March projections. Most notably, the institution upgraded the 2025 forecast to 2.2%, higher than its 2% target. It is essential to note that the ECB, based in inflation-allergic Germany, does not see inflation falling significantly in the next two years. It calls for more aggressive tightening.
Secondly, ECB President Christine Lagarde focused on the labor market, moving beyond the bank's focus on inflation. She stressed that wage increases, higher working hours and negotiated wage bargains – unions are strong in the old continent – are behind inflation. She repeated the message several times. That implies higher rates for longer.
Third, while Lagarde only talked about a hike in July and not beyond, she left the door wide open to further interest-rate increases. She said that "we need to be confident that core inflation is heading down" – unveiling a current lack of conviction. Moreover, it is another move away from focusing only on headline inflation.
All in all, the current drop in inflation is insufficient for the ECB – forecasts are high, core inflation is eyed, and the labor market has become a factor. They all point to persistent inflation, which requires more action. "As long as they persist, we will persist," says Lagarde. Persistent Euro demand is the name of the game.
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