EconoFACTS

March 16, 2023 | 11:08

ECB Sticks To the Plan... +50 bps

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

This is a perfect example of follow-through......

The ECB, true to its word given last month, raised the three key interest rates by 50 bps for the third meeting in a row, bringing the refi rate to 3.50%, the marginal lending facility to 3.75%, and the deposit facility to 3.00%. That's a total of 350 bps of tightening over a span of nine months. And there would be more coming, probably of the same size, if it weren't for what happened over the past week in financial markets.

But given the extreme volatility in financial markets, the central bank dropped any and all types of forward guidance, as it should. And it looks like some of the extreme hawks were put in their place as the Press Statement noted that the "elevated level of uncertainty reinforces the importance of a data-dependent approach". So, can one expect a more chastened head of Austria's central bank in coming days? Unlikely. Robert Holzmann may not repeat his push for four more 50 bp rate hikes, but he will emphasize the great need to bring inflation back to 2% quickly. That would be fair.

Today's decision was backed by a "very broad majority" while "3 or 4" wanted to "give it more time to see how the situation unfolded". I'll venture a guess on who was in the minority .... Austria, Germany and the Netherlands?

The press conference did not unveil too many interesting nuggets except perhaps President Lagarde's comment that if their baseline were to persist, then "we have a lot more ground to cover." It is unfortunate that the new growth and inflation forecasts are already old. See the table below..... the new staff projections saw growth this year lifted, and downgraded for the next two years following. Inflation is expected to slow more than what was expected back in December; in fact, it looks to hit the 2% target in 2025. But, these projections are already dated as they were prepared before the chaos that ensued in financial markets.

Wrapping things up: Anything short of a 50 bp hike today would have made the ECB look soft. But President Lagarde toned down the hawkishness to emphasize the data-dependency of their decision-making, and that it will be done on a meeting-by-meeting basis. And of course, they are "ready to respond" if needed, to ensure price and financial stability.

Bottom Line: Is the ECB finished? No. Let's not forget that core CPI is still at a record-high. We still expect more hikes...maybe not of the 50 variety but spread out over the course of a couple of meetings and not necessarily back to back. But terminal is still at 4.00%. For now. Let's take it on a meeting-by-meeting basis, and watch the data. (Where have I heard that before?)