EconoFACTS

September 08, 2022 | 10:34

ECB Hikes 75 bps .... More To Come

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

The ECB is proving that it, too, can be flexible and change as conditions change. It did so in July with its 50 bp hike, and today with its 75 bp hike. The reason behind today's aggressive move (though it is not the only major central bank to do this ... becoming almost commonplace these days) was inflation. It "remains far too high", pressures are broadening, and is expected to stay above target "for an extended period". Once again, the word "frontload" made its way to the Statement. The EUR's depreciation is also adding to the buildup in inflationary pressures. Unfortunately, the EUR lost ground after the announcement and is back below parity.

Where are rates now? The deposit rate was lifted to 0.75%, the refi rate to 1.25%, and the marginal lending facility to 1.50%.

Where are the risks? To inflation... higher, to growth... lower. Take a look at the new staff projections in the table below.

How about future moves? President Lagarde really stuck to her guns, repeating at every turn that all decisions are data-dependent and will be made meeting by meeting. Remember: she tossed forward guidance out the window last time. But there were a couple of key points that she made that were intriguing:

not trying to mimic other central banks (again pointed out that U.S. inflation was demand-driven, but supply-driven in the Euro Area)
front-loading is not a permanent exercise (gosh, I would think not!)
still far away from the terminal rate (the number they do not know) ... will take more than 2 meetings, but less than 5, to get there. Fascinating!

Now what? Wait and see, and watch the data. But as the possibility of a complete cutoff of Russian energy continues to rise, so too, will the price for gas, sending inflation even higher. Unlike in North America, peak inflation will be more of a Q4 story, which means more aggressive moves by the ECB. Taking President Lagarde at her word, our base case scenario is for rate hikes to continue into 2023, after another 75 bp hike in October and a 50 bp hike in December.

But .... everything is data-dependent and we, too, shall take this meeting by meeting.