Flash ECB Review - Confirmed: A final rate hike, but restrictive policies are not over
- Today, the ECB delivered a 25bp rate hike and indicated that it is now on pause, which is fully in line with our expectation.
- ECB still expects inflation will ‘remain too high for too long’, but it now wants to work with the 'patience' argument more than the ‘level’ argument for additional hikes, i.e. see the lagged effect of the monetary policy tightening already implemented impact the inflation outlook.
- The ECB’s staff inflation projection was revised higher for 2023 and 2024 but lower for 2025. For core inflation, the projection is now slightly lower across the board.
- We recommend to pay the December 2023 ECB meeting.
No additional ECB hikes
Today, the ECB announced that all three policy rates will be hiked by 25bp (effective from 20 September) and guided that it will not make any more hikes for now. In our view, the monetary policy statement can best be described as a balancing act in a stagflationary-ish environment. The ECB’s clear message to markets is that inflation is still too strong, but economic activity and the outlook are weaker. As a result, today’s decision should be seen as a compromise in the governing council. During the Q&A session, president Lagarde also said that today’s hike was taken on the back of a ‘solid majority’ as ‘some’ members favoured a pause to see how the monetary policy decisions already taken so far are working through the economy.
It was somewhat surprising to us that the ECB didn’t include much optionality for additional rate hikes, should the incoming data warrant it. The guidance provided was clear the ECB is on pause for now as it weighs the weakening economic outlook and its impact on inflation. As usual, Lagarde also highlighted that the three key elements still prevail in their reaction function: monetary policy transmission, inflation outlook and the economic and financial data. As such, given the current information, the ECB is done with further hikes, but should economic acitivity hold up better than anticipated or inflation see another rise near term, the ECB is ready to adjust its policy rate. Overall, we see the ECB’s monetary policy-setting approach focusing on the 'patience’ argument and not the ‘level’ one.
During the Q&A session, Lagarde also said that the transmission channel is working faster in the current hiking cycle than in previous hiking cycles.
The ECB didn’t discuss advancing PEPP reinvestments or potential APP sales today. The Italian-German bond spread tightened marginally on the ECB not having discussed further balance sheet normalisation.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
