The European Central Bank raised interest rates for the fourth time in a row on Thursday, and outlined plans to shrink its bloated balance sheet from March 2023 to contain inflation.
The central bank raised its deposit rate to 2%, as expected, and kept further hikes firmly on the table, as fresh economic projections indicated it would still take years to bring price growth back to 2%.
MARKET REACTION:
FOREX: The euro was down 0.3% on the day against the dollar at $1.0651, but was up from $1.0624 just before the ECB’s rate decision.
BONDS: Germany’s 10-year Bund yield was up 10 bps on the day at 2.03 % compared with 1.94% before the move, while Italian 10-year bond yields were 22 bps higher at 4.22%
STOCKS: The region-wide STOXX 600 index tumbled and was last down 1.53%.
COMMENTS:
MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON:
“It (the ECB statement) is very hawkish. One thing that stands out is the inflation forecasts for 2025, they are still forecasting inflation to be above target.
“The 50 bps hike was expected and the pace of QT (quantitative tightening) was in the ballpark of what folks were expecting.
“Despite weaker growth projections the tightening in place is not enough and more needs to be done, that appears to be the main message here.”
ALEX LIVINGSTONE, HEAD OF TRADING, TITAN ASSET MANAGEMENT, LONDON:
“Terminal rates are now being priced in at 4.8% in the US, 4.4% in the UK and 2.8% in the euro zone, with the market pricing for greater sustained price pressures in the UK and Eurozone over and above the US, catalyzed most prominently by higher energy costs, resulting in supply side weakness.
“As price pressures being too moderate in the US however, and the bellwether of the 2-10yr US yield curve flashing at the most inverted level in over four decades, it is no wonder growth will now be a pressing concern on Jerome Powell’s agenda. Whilst for the Eurozone and the UK we don’t appear to be out of the woods just yet, as the necessary tightening of financial conditions looks set to weigh on both equity and bond returns.”
BAS VAN GEFFEN, SENIOR MACRO STRATEGIST, RABOBANK, UTRECHT:
“Even though the hike itself was as expected, just 50 basis points and slower than it was in the previous months, the communication around the decision was decidedly more hawkish than so many in the market may have expected.
“Even though the ECB is now going at it a bit slower, that doesn’t necessarily mean that they’re also going to target a lower terminal rate. At this stage, I think it’s still safe to say that 50 basis points is still a realistic expectation for the first meeting next year.
They hiked as expected but they did provide a bit more detail as to their policy early next year or even a bit further into next year which is on balance more hawkish than some of the market may have thought.”
(Reporting by the London and Bangalore Markets Teams, Editing by Amanda Cooper)
