May 04, 2023 | 09:47
ECB +25 bps as Inflation is "Too High ... for Too Long"
Inflation ... too high... for too long.
That line (or some form of it) kicked off the past two Press Statements. And that is what continues to guide the Governing Council in its decisions.
The ECB, as expected, toned down the pace of rate hikes today. After three 50 bp hikes in a row, which were preceded by two 75 bp rate hikes in a row, it raised key interest rates by 25 bps, bringing the main refinancing rate to 3.75% (the highest since October 2008), the marginal lending facility to 4.00%, and the deposit facility to 3.25%. That is a total of 350 bps of rate hikes in nearly a year.
No surprise there.
The instant assumption (or perhaps it was just yours truly) was that, perhaps in a nod to the hawks, the Press Release also announced that it will stop reinvestments under the Asset Purchase Programme (APP) as of this July. That, will help the €7.7trln balance sheet (down from a peak of €8.8 trln) shrink further. But that is something that President Christine Lagarde denied firmly. In fact, the ECB head was very clear when she pointed out that there was almost unanimous support for today's decision, and that "some" felt that 50 bps would be appropriate, while "others" thought that 25 bps was good. And, no one said pause. In fact, President Lagarde said "we are NOT pausing" and that the ECB has "more ground to cover".
Bottom Line: Although she did mention the data-dependency factor frequently, it seemed that the phrase "meeting by meeting" was not used as often this morning. The key takeaway was that, no, they are not finished (got that message loud and clear) but it does not sound like they are in the early innings either. As of now, we are comfortable with our "one more and that's it" call. So we look for one more 25 bp hike in June and, unless there is still no improvement in inflation, the ECB will step to the sidelines.