ECB said it’ll stay the course on rate hikes. But it’s not clear for how long

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Christine Lagarde, President of the European Central Bank (ECB).

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Christine Lagarde, president of the European Central Bank, has repeatedly used the phrase “stay the course” when it comes to upcoming interest rate decisions, but some market observers doubt that the bank will continue its aggressive stance for much longer.

The ECB tightened with four interest rate hikes last year in an attempt to bring the high inflation in the eurozone under control. These decisions brought the main deposit rate from -0.5% to 2%.

Recent data showed a consecutive fall in headline inflation in two months, but this is still well above the ECB’s target of 2%. ensure a timely return of inflation.”

But ECB watchers ask: for how long?

“Uncertainty about the ECB’s moves after March is heightened, with some aggressive members of the Governing Council signaling further hikes in the second quarter,” Francesco Maria Di Bella, fixed income strategist at UniCredit, told CNBC via email. .

“The size of those rate hikes will depend on the inflation outlook. Lower price pressures will likely allow the ECB to raise by 25 basis points instead of 50 basis points in May and June,” he added.

Fabio Panetta, member of the ECB’s Executive Council, reportedly said earlier this week that the central bank should not commit to specific rate hikes after its March meeting.

Markets have priced in a 50 basis point hike for the next two policy meetings, one next week and the other in March.

“Panetta’s speech shows that the ECB doves are regrouping, but the hawks are still firmly in charge for at least the next few meetings, for which our baseline scenario is two 50 basis point increases,” said Davide Oneglia, director at TS Lombard in an email to CNBC.

The ECB, which has acted as the region’s central bank since 1991, has historically been more on the dovish side after many years of moribund inflation. But the energy crisis, strict supply chain issues and other bottlenecks have pushed prices across the bloc and led to a new tone from the central bank.

A Reuters poll released earlier this week showed that markets expected the ECB to pause rate hikes in the second quarter once the deposit rate reaches 3.25%.

“How far the ECB will actually be able to go after March remains to be seen,” said Oneglia, adding that “a final interest rate of 3.50-3.75% seems possible” but that the ECB “cannot afford too much for too long.” may differ from that of the Fed.”

Traders have begun to consider whether the Federal Reserve could end its tightening cycle in upcoming meetings following weaker-than-expected data last week.

So if the US slides into a more severe recession than expected and/or the Fed were to aggressively cut rates in response to a slowdown, [the] The ECB’s rate hikes could end sooner,” he said.

However, economic data in the Eurozone seems to surprise positively. The Eurozone’s composite purchasing managers’ index, released on Tuesday, showed positive growth.

This reduces the likelihood that the ECB will have to end or even reverse its aggressive tone, but analysts don’t think the central bank will have to walk much longer.

Andrew Kenningham, of Capital Economics, also told CNBC that he expects another 50 basis points increase in February and March and then another 25 basis points in May and June.

“After that, we see the policy rate remain unchanged until the second half of 2024,” he added.

One aspect to consider is how inflation may continue to decline in the coming months as energy costs continue to fall.

Ahead of what the ECB will announce next week, Kenningham said: “The language will be aggressive and emphasize the need to move forward and ‘stay the course’ without being explicit about amounts and dates for rate hikes.”

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