ECB WATCH: Rates Reprice As Lagarde Promises More 50BP Hikes

The European Central Bank raised rates by 50 basis points on Thursday and said it would continue to hike by the same increment at a steady pace to restrictive levels in response to higher inflation projections, sending market expectations for peak interest rates surging.

The ECB will also start reducing its Asset Purchase Programme portfolio at an average rate of EUR15 billion per month from the beginning of March until the end of the second quarter of 2023, with the subsequent pace to be determined “over time" (see MNI SOURCES: Rates/QT Trade-Off Central To Next ECB Decision).

The decision to raise all three key rates by half a point, taking the deposit rate to 2%, came after a substantial upward revision to the medium-term inflation outlook, the Governing Council said. Headline inflation is now seen at 2.3% - a third of a point above target - in 2025, while core inflation is set to hit 2.4% over the same period, according to Eurosystem staff projections.

“The Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target,” the ECB said in a statement, which President Christine Lagarde later clarified by saying “We should expect to raise interest rates at a 50 basis-point pace for a period of time.”

PEAK RATE EXPECTATIONS JUMP

Interest rate futures jumped, implying a peak rate of 3.06% in July, up about 20 basis points on the day. The euro rose as high as USD1.0735 before easing back above USD1.064.

“We have more ground to cover, longer to go, and we are in for a long game,” Lagarde told journalists in Frankfurt, pointing to upside inflation risks. “We’re not pivoting, we’re not wavering, we are showing determination and resilience in continuing a journey.”

Average inflation will reach 8.4% in 2022, and fall only to 6.3% in 2023. Growth will slide to 0.5% next year, down from September’s 0.9% projection, before recovering the following year.

Even as she promised 50-basis-point hikes, Lagarde said the Governing Council will continue to follow a data-led, meeting-by-meeting approach.

“What we know today is that given the financing conditions, given the expected terminal rate embedded in our projections [the current monetary policy stance] is not enough.”

Not all members agreed on the “tactics” the ECB has adopted, Lagarde said - “Some might have wanted to do a bit more, bit less - but overall there was a broad majority in favour.”