LONDON (Reuters) -The European Central Bank raised its key interest rate to a record peak on Thursday and signalled this will likely be its final move in a more-than year-long fight against stubbornly high inflation.
The central bank for the 20 countries that share the euro also raised its forecasts for inflation, which it now expects to come down more slowly towards its 2% target over the next two years, while cutting its expectations for economic growth.
That illustrated the dilemma the ECB faced, with prices still rising, but economic activity struggling.
MARKET REACTION:
FOREX: The euro fell and was last down 0.6% at $1.0669, having hit its lowest level in over three months.
BONDS: Euro area government bond yields fell, with two-year yields in the bloc’s benchmark issuer Germany last at 3.15%, down 2 basis points on the day. Italy’s 10-year bond yield was down 8 bps on the day at 4.377%
STOCKS: The pan-European STOXX 600 index rose and was last up 0.8%.
COMMENTS:
POOJA KUMRA, SENIOR EUROPEAN AND UK RATES STRATEGIST, TD SECURITIES, LONDON:
“Markets are basically rejoicing that this is the end of the cycle and that’s why even this 25-basis points rate hike is being met by a strong rally.”
“Basically, now we are at restrictive territories and the key focus right is to remain here till they get inflation back to target. The ECB is at the stage where they can rely on growth and tighter financial conditions to get there (inflation target) rather than hiking rates to get there.”
MARK WALL, CHIEF EUROPEAN ECONOMIST, DEUTSCHE BANK RESEARCH, LONDON:
“In the end, the ECB decided to hike again. A lingering pause is being signalled, but it’s a low-conviction pause. The ECB has retained the option to hike further if necessary. There is no declaration of victory on inflation.”
JAMES ROSSITER, HEAD OF GLOBAL MACRO STRATEGY, TD SECURITIES, LONDON:
“Key to the policy statement was that 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'”.
“This is a clear sign that absent any further notable upside surprises to inflation and its drivers, they are done hiking rates.”
JOHN LEIPER, CIO, TITAN ASSET MANAGEMENT, LONDON:
“Markets went into the ECB meeting expecting a rate hike and that’s what we got. The ECB stated that inflation risks remain skewed to the upside and are seen as too high for too long.
“My concern is this tips the economy further into recessionary territory, coming as it does, against a backdrop of deteriorating economic data and shrinking euro zone money supply which declined for the first time in 13 years in August.
“If I had to provide an analogy… it seems to me like the ECB keeps adding chips to one side of the inflation-growth weighing scales… which is now teetering dangerously close to falling over.”
MIKE BELL, STRATEGIST AT JPMORGAN ASSET MANAGEMENT, LONDON:
“With the business surveys indicating an imminent sharp slowdown in growth, the ECB are probably done hiking.
“The new orders component of the latest business surveys were very weak. Incoming new business for the service sector is contracting now, joining new orders for the manufacturing sector in the doldrums.
“Against the weaker growth backdrop, the ECB can probably pause at the next meeting and if the growth outlook continues to deteriorate a pause could morph into a peak.
“However, unless unemployment rises sharply and rapidly, the outlook for euro zone interest rates could end up looking like Table Mountain, with rates on hold for quite some time.”
ANNA STUPNYTSKA, GLOBAL MACRO ECONOMIST AT FIDELITY INTERNATIONAL, CAMBRIDGE, UK:
“I wasn’t surprised because, in that choice between hiking and sending a hawkish message and waiting, the more hawkish message to signal that the ECB is very serious about inflation clearly won.”
DEAN TURNER, CHIEF EUROZONE AND UK ECONOMIST, UBS GLOBAL WEALTH MANAGEMENT:
“The ECB didn’t blink in the face of growing speculation that it would hit pause on the rate-hiking cycle. To be sure, economic data have raised questions about the health of the economy, but it is clear that still-high inflation trumps these concerns.”
“We expect this to be the last hike from the ECB in this cycle, but that does not mean the era of tight monetary policy is over. Interest rates are likely to remain at these levels well into next year. Moreover, the ECB will continue to, and may even accelerate, the shrinking of its balance sheet.”
SIMONA MOCUTA, CHIEF ECONOMIST, STATE STREET GLOBAL ADVISORS, U.S.:
“The ECB pushed through another 25 bp rate hike today… The move was neither a surprise, nor a done deal: odds of another step higher had only crept above 50% in the days immediately preceding the decision, having hovered around 25% at the start of the month.
“To be sure, arguments in favour of continued tightening and those in support of a pause – if not an outright end to the tightening cycle altogether – have become rather finely balanced of late, given a backdrop of near-stagnation and visible progress on inflation.
“For now, the Governing Council still judged the scales as tipping in favour of additional pre-emptive action. But, with policy rates deeply in restrictive territory and earlier tightening still feeding through the economy, we believe this should be – and likely will be – the last hike in this cycle.”
(Reporting the Markets Team; Compiled by Dhara Ranasinghe; Editing by Amanda Cooper)
