The recent market turmoil has not deterred the ECB from fighting inflation. Dropping forward guidance,
lowering inflation projections, and a growing awareness that tightening so far can have negative effects
suggest that today's meeting may mark the end of ECB tightening.
The latest financial market developments cast doubt on whether the European Central Bank would hike
today. However. The ECB raised rates by 50bp as expected to maintain its inflation-fighting credibility.
Rates were unannounced by the ECB. The ECB cited a resilient European banking sector and said it
would 'respond as necessary' to financial market turmoil.
Staff forecasts indicate lower inflation.
The ECB's latest macro forecasts have a two-week cut-off date. Thus, the latest market turmoil is not
considered. These forecasts offer intriguing insights. In 2025, headline and core inflation will drop to
2.1% and 2.2%, respectively. ECB calls inflation too high for too long.
With an upward revision of its growth forecast for this year to 1% and further strengthening to 1.6% in
2024 and 2025, the ECB remains too optimistic. Even though the ECB blames monetary policy tightening
for a slight growth downgrade in 2024 and 2025. However, the latest market developments are another
reminder that the most aggressive monetary policy tightening since the monetary union will have only
marginal effects on the eurozone economy. The ECB's prediction that eurozone growth will return to
0.4% quarter-on-quarter from 2024 is optimistic.
No longer unconditional lender of last resort
Today's decisions show the ECB is no longer the eurozone's lender of last resort. Since the 2007–2008
financial crisis, financial markets have expected central banks to be the lender of last resort. The ECB has
helped in European financial, euro, and pandemic crises. if necessary.
Inflation is the main difference from 15 years ago. Inflation prevents the ECB from returning to
firefighting. Since the euro crisis, the ECB has had to balance financial stability and price stability, which
can be a conflict of interest. ECB President Christine Lagarde repeatedly stated during the press
conference that there was no trade-off between monetary policy and financial stability and that the ECB
would address both with separate instruments.
Today's meeting may signal the end of monetary policy tightening.
Markets and central bankers are experiencing what first-year economics students learn: monetary policy
affects the economy. It's no surprise that the eurozone's most aggressive monetary policy tightening
since 1999 has and will have negative effects. The last few days have reminded the ECB that fighting
inflation will be harder than it has been. The first phase of exiting unconventional measures (negative
interest rates and bond purchases) went smoothly, but now that interest rates are restrictive, every rate
hike increases the risk of breaking something.
Today, Lagarde said the ECB had 'a lot more ground to cover' in raising interest rates. Lagarde added
that this applied to the current base case scenario, which is outdated due to market woes. The ECB
(rightly) avoided forward guidance and stressed data dependency, suggesting that interest rates may
peak sooner than expected. Despite market turmoil, the ECB did not blink today. The ECB's resolve will
be tested in the coming hours and days.
Overall, today's decision and communication set the stage for contentious meetings. Rate hikes increase
the risk of something breaking. Thus, today's decisions may signal the start of the ECB's final tightening
cycle, which will slow rate hikes. We continue to expect two more 25bp hikes from the ECB before
summer and then a longer wait-and-see