September 14, 2023 | 10:18
ECB Hikes 25 bps.... The Beginning of the End?
It is a humbling job, trying to figure out what a central bank will do.
Not all are like, say, the Norges Bank ("The Committee’s current assessment of the outlook and balance of risks implies that the policy rate will most likely be raised further in August." June 2023); or, Brazil ("For its next meeting, the Committee foresees as likely an extension of the cycle, with an adjustment of lower magnitude." May 2022). Or even the BoJ for that matter. The ECB really keeps the market on its toes with its 21 votes, made up of the Executive Board and various governors of the Member States' national central banks. I'm sure it is tough to share each other's calendars to make sure they're all available for those meeting dates ("Sorry, I already planned to take that week off for a family camping trip; can we do it the week after?"), let alone agreeing on how to proceed with key interest rates.
I would've loved to be a fly on the wall in Frankfurt for this meeting. The announcement to raise the key rates by 25 bps (deposit facility to 4.00%; the refi rate to 4.50%; and, the marginal lending facility to 4.75%) surprised no one, even though the market was equally split between "on hold" and "hike". (Full disclosure: yours truly was in the former category but freely admitted while parked on the fence that it was a coin toss.) The decision may have been backed by a "solid majority" (source: President Lagarde) but there must have been a heated (but respectful) debate to get to that point. She pointed out that they did a lot of analysis with lots of data but the discussion was not antagonistic. Whether or not everyone kept an "open mind" about what to do, as they agreed to back in July, will not be known. But "some would have preferred to pause".
The updated Staff forecasts were, once again, noteworthy. See the table below. The economic growth outlook was lowered, although 75% of the reduced forecast for 2024 (1.0% vs June's estimate of 1.5%) was due to, as President Lagarde said repeatedly, carryover from 2023. "We are currently in a phase of very sluggish growth" so the sluggish momentum ("the difficult times are now") spills over into next year. The inflation forecasts were again revised higher but that was due to energy. Core CPI was left unchanged for this year (remember: the Staff revised it sharply higher back in June) and was trimmed a smidge for the two out-years.
And because of these new forecasts, that brings us to the new line that the President also repeated often:
"Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target. The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary."
In short, the ECB is signalling that is now finished, even though President Lagarde declared that the Bank is not saying that rates are at the peak. Rates will stay at these levels (rate cuts were not discussed) until they get inflation back to the 2% target. The end. Drop mic.