ECB Watch - ECB rate hike cycle looks far from over

The ECB raised its key policy rates by 25bp as widely expected. ECB President Christine Lagarde described the decision as a ‘no brainer’, which got unanimous support in the Governing Council and was ‘robust to all scenarios’. The ECB’s communication and staff macro projections suggest that the rate hike cycle is far from over. The ECB upgraded its inflation forecasts for 2027-2028, with both headline and core inflation seen above its 2% target over the medium term. This in itself suggests that it has more work to do, but this sense is further strengthened by the assumptions underlying the ECB staff’s updated projections.

The numbers already incorporated around 50bp of additional rate hikes (following the normal technical convention of assuming market interest rates at the cut-off date of the projection). They also assumed oil and gas price curves that are below today’s levels. Meanwhile, the ECB also judged the risks to this already unsatisfactory inflation outlook as being to the upside. Finally, the ECB was quite constructive on the economy, saying that the near-term growth outlook has improved, so the impact of tighter financial conditions on growth is unlikely to be much of a concern. We will be re-assessing our ECB projections given recent energy market developments and the ECB communication and will be publishing new forecasts shortly. (Nick Kounis and Bill Diviney)