Thoughts

March 10, 2023 | 15:32

ECB: 50 Now, But What About Later?

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

With a number of central banks out of the way (RBA, BoJ, BoC), all eyes will be on the ECB’s March 16th announcement. The decision itself should not be a surprise—a 50 bp rate hike to the key interest rates is widely expected, bringing the refi rate to 3.50%, the marginal lending facility to 3.75%, and the deposit facility to 3.00%. After all, following the 50 bp hike in February, the Statement declared that the Governing Council “intends to raise interest rates by…50 bps… in March…” Forward guidance doesn’t get more explicit than that!

Now here we are, with that key meeting just days away. The statement, the press conference, and the new economic forecasts will be scrutinized and dissected. The language will be very hawkish, but don’t look for such specific forward guidance to be used again for the May decision. In fact, there will be plenty of behind-the-scenes pushback on over-committing. Already, tensions are brewing between one particular hawk and dove. Austria’s Robert Holzmann said that the ECB should raise rates 50 bps in each of the next four meetings, which prompted a livid Ignazio Visco of Italy to remind everyone that there was still much uncertainty and that the Governing Council had already agreed to make decisions on a meeting by meeting basis. So “I therefore don’t appreciate statements by my colleagues about future and prolonged interest rate hikes”. And there may be nervousness about market volatility prompted by SVB’s woes.

Totally understandable. But the majority will likely lean towards at least another 50 bp hike in May, particularly as the Euro Area core CPI has surprised to the upside, reaching a record-high 5.6% as of February. The region’s economy has also been stabilizing of late, suggesting that it can deal with higher rates. Besides, President Lagarde has been channelling Mario Draghi when she said that the bank will “continue to take whatever measures are necessary to bring inflation back to 2%”. That statement alone suggests that the ECB would rather risk doing too much, than too little, for fear of high and prolonged inflation.