European Central Bank raises interest rates, as inflation outlook is ‘too high for too long’ – business live

Key events

The eurozone economy is diverging, Christine Lagarde warns.

Manufacturing is working through a backlog of orders, but its prospects are worsening, she explains. But the services sector is growing, benefiting from the relaxation of Covid-19 restrictions.

Lagarde adds that eurozone unemployment fell to a historical low of 6.5% in March.

Onto economics, and Lagarde points out that the eurozone economy grew by 0.1% in the first quarter of this year, according to early estimates.

Lower energy prices, the easing of supply bottlenecks and fiscal policy support for firms and households have supported economic resilience, she says.

But, private dometic demand, and consumption, remains weak.

Lagarde adds that business and consumer confidence have risen in recent months, but remain weaker than before Russia’s “unjustified war against Ukraine and its people”.

Lagarde adds that the ECB will stop reinvesting cash from maturing debt in its €3.2trillion Asset Purchase Programme (part of its recent stimulus programme) from July.

She says:

The APP portfolio is declining at a measured and predictable pace, as the Eurosystem does not reinvest all of the principal payments from maturing securities.

The decline will amount to €15 billion per month on average until the end of June 2023. The Governing Council expects to discontinue the reinvestments under the APP as of July 2023.

Christine Lagarde begins her press conference by reading out the statement released half an hour ago.

She says:

The inflation outlook continues to be too high for too long. In light of the ongoing high inflation pressures, the Governing Council today decided to raise the three key ECB interest rates by 25 basis points.

Overall, the incoming information broadly supports the assessment of the medium-term inflation outlook that the Governing Council formed at its previous meeting.

Headline inflation has declined over recent months, but underlying price pressures remain strong. At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain.

The Governing Council’s future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.

She adds that the ECB will “continue to follow a data-dependent approach” to determine the appropriate level of interest rates, and how long they stay at those levels.

ECB press conference begins: watch live

ECB president Christine Lagarde has arrived for a press conference to discuss today’s interest rate increase.

You can watch it here (and at the top of this blog).

Today’s interest rate increase is a ‘dovish hike’, says Altaf Kassam, EMEA Head of Investment Strategy & Research at State Street Global Advisors.

“The ECB delivered a dovish 25 basis points (bps) hike today, in line with current market pricing. The first drop in the core inflation reading since June last year, as well as the latest quarterly bank survey showing the most tightening of credit standards since the region’s debt crisis in 2011, appeared to have swayed the decision.”

“In the end, downshifting to 25bps was the path of least resistance, allowing the ECB to continue to show resolve in the fight against inflation while keeping one eye on financial stability risks. Arguably, this 25bps hike gives the Bank the optionality they need going forward given the dual risks of growth and inflation.”

Kassam suggests that today’s decision was perhaps the most ‘in the balance’ since the ECB’s current hiking cycle began.

We saw some persistence in inflation – with the headline number moving back up on the latest read and services inflation remaining sticky – as well as recent data showing that rather than easing as anticipated, the labour market appeared to have tightened again, making any increase in unemployment in the short term very uncertain.

In the end, lingering concerns on the variable and lagged effects of previous actions, as well as continued issues around the banking sector (although still focused on the US), led to the more dovish 25 bps increase.”

The euro has fallen against the US dollar since the ECB’s decision was announced.

The euro is down almost half a cent at $1.102.

Traders will have noted that the ECB has not explicitly committed to furter increases in interest rates, saying that future decisions will be “data-dependent” (see earlier post).

ING: ECB is in final stage of tightening cycle

Today’s decision signals that the ECB has entered the final stage of its current tightening cycle, predicts Carsten Brzeski, global head of macro at ING.

Brzeski argues that any future interest rate rises could be a mistake:

As expected, the central bank increased its main policy interest rates by 25bp, bringing the deposit rate to 3.25%. Since July last year, the ECB has hiked interest rates at every single policy meeting, by a total of 375bp. This is by far, the most aggressive monetary policy tightening cycle since the start of the monetary union.

While today’s hike is the seventh increase in a row, it is the smallest in the current cycle, suggesting that the ECB has entered the final stage of this tightening cycle. Although recent data has confirmed that underlying inflationary pressure is stickier than expected, weak credit growth and the latest results of the Bank Lending Survey have indicated that the rate hikes so far are leaving clear marks on the economy. And these effects have been stronger and materialised faster than the ECB probably expected.

In fact, at current levels and given the lagged impact of monetary policy tightening both in the eurozone and the US, the risk is high that every single additional rate hike from here could turn out to be a policy mistake further down the road.

The European Central Bank’s interest rate tightening cycle is the fastest in the history of the ECB, says Pictet Wealth Management’s Fred Ducrozet:

The ECB says any future interest rate increases will depend on the inflation outlook, underlying price pressures and the effectiveness of monetary policy transmission.

The Governing Council’s future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.

The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council’s policy rate decisions will continue to be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.