EUR Drops As ECB Hikes Rates (As Expected); Raises Inflation Outlook, Sees Downside Growth Risks
The European Central Bank increased interest rates for the second time since the Iran war broke out in February, responding to signs inflation is set to stay well above 2%.
The deposit rate was lifted by a quarter-point to 2.5% on Thursday, as predicted by almost all economists in a Bloomberg survey.
“The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period,” it said in a statement.
“The outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth.”
GUIDANCE:
As widely expected, the Governing Council left his language on the future rate path unchanged, repeating the mantra of being “well-positioned" and following a "data-dependent and meeting-by-meeting approach."
That actually leaves all options open for the coming months, and it seems likely that Lagarde will try to do the same later.
INFLATION
- Inflation is set to remain well above target for an extended period.
The ECB raised its inflation outlook for the next two years...
*ECB SEES 2027 INFLATION AT 2.5%%; PRIOR FORECAST 2.3%
*ECB SEES 2028 INFLATION AT 2.1%; PRIOR FORECAST 2%
*ECB SEES 2027 INFLATION EX-FOOD/ENERGY AT 2.6%% VS 2.5%
Despite more encouraging signals, though, as underlying inflation and a closely watched gauge of services prices retreated. Wage pressures also eased.
ECONOMIC OUTLOOK
- The outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth.
Thursday’s move puts euro-area policymakers further ahead of their peers in reacting to the energy-price surge that’s produced the fastest inflation in almost three years.
Traders see the ECB doing more, pricing two further hikes by mid-2027.
That contrasts with the Federal Reserve and the Bank of England, which are yet to tighten monetary policy over the fighting in the Middle East and may refrain again next week.
Interestingly, despite the relative hawkishness, the EUR is fading this news...
Patrick Ernst, a strategist at J.P. Morgan Private Bank:
“The ECB moved as anticipated, but what accompanied that rate decision matters more. In keeping the door open to further tightening, policymakers made clear that an energy-led inflation risk is still very much in play. One hike is not a ceiling. The odds of another before year-end have risen.”
President Christine Lagarde, who continues to be linked with an early departure from her role, will face journalists at 14:45 p.m. in Berlin.