EconoFACTS

December 15, 2022 | 09:53

ECB .... A Hawkish Hike (vs the BoE's Dovish Hike)

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

One must give the ECB some credit. Despite its wide range of policymakers representing a wide range of countries with a wide range of interests during these exceptionally challenging times, the central bank managed to appease both versions of hawks... the uber-hawkish and the ones that are less so (former doves).

Key points to take away:

A broad majority agreed to raise key rates 50 bps, leaving the refi rate at 2.50%, marginal lending facility at 2.75%, and the deposit facility at 2.00%. The uber-hawks would've preferred 75 bps but they still got their message across. How? Read the next bullet.
The message was undeniably hawkish: Note the new words that were used.... rates still need to rise “significantly” and at a “steady pace” to levels that are "sufficiently restrictive”. It all goes back to inflation, where the risks are still "primarily on the upside" (note the upward revisions to its CPI forecasts in the table below), while the risks to growth are still on the downside, "especially in the near term".
And today's rate hike is not the end. During the press conference, when asked about the wording, President Lagarde said—in a rare moment of clarity... almost, dare I say.... forward guidance?—that 50 bp moves can be expected for a period of time. We will be revisiting our estimate for terminal.
Despite the one-month pullback in the Euro Area inflation in November, and possibly again in December—and this is why one should never hang their hat on just one or two months' of data—President Lagarde warned that January and February's inflation data are likely to be higher.
APP ..... reductions of €15 bln/month will begin in March 2023, on average, until the end of 2023Q2. The pace will be regularly assessed.

Bottom Line: Some central banks may be easing up on the pedal, but the ECB is not one of them. It is bravely forging ahead, even as the economy weakens. This was a hawkish hike, unlike the BoE's 50 bp move, which was a dovish hike.