MNI ECB Review - October 2022: Another 'Jumbo' Hike

MNI ECB Review - October 2022: Another 'Jumbo' Hike

As widely expected, the ECB delivered a second 75bp policy rate hike at the October meeting, despite some previous protestations from more dovish GC members who argued that such ‘jumbo’ hikes should not be considered a new normal. The ECB also adjusted the TLTRO terms in a bid to encourage early repayment, with President Lagarde stressing that this was needed to reinforce the transmission of monetary policy. In line with our thinking that it was too premature to unveil a roadmap for quantitative tightening at the October meeting, Lagarde indicated that a decision would instead be taken in December.

While the 75bp hike and change in TLTRO terms were both expected, and the delayed QT announcement not wholly surprising, the notably less hawkish communication which accompanied the ‘jumbo’ hike came closest to being a ‘surprise’ for the meeting. This notably included the ECB’s decision to abandon its commitment to hiking rates ‘at the next several meetings’ and an explicit statement that the GC had made ‘substantial progress in withdrawing monetary policy accommodation’. This was accompanied by a commitment to having a ‘meeting-by-meeting’ and ‘data dependent’ approach and concerns about the deterioration in economic growth and rising recession risk. Although President Lagarde indicated in the press conference that the ECB was ‘not done yet’ with respect to policy tightening, the toned-down statement and downbeat assessment of economic conditions can be interpreted as a dovish pivot reflecting both concerns about a looming recession and likely expectation that the terminal rate is approaching.

However, it still seems too early to transition towards a slower pace of tightening. Eurozone inflation is on the cusp of double-digit territory, while preliminary data for October (published after the GC meeting) showed a substantial upside surprise for inflation in Germany, France and Italy. As we noted in our preview of the October meeting, there is not yet a definitive end in sight for the upside surprises in inflation. Unless there is a material improvement in the inflation outlook by December, or a marked deterioration in economic activity, a decision to slow the pace of policy rate hikes would require the ECB to make a judgement call on how effective previous policy rate tightening, and projected weaker demand, will be in returning inflation to target.

For the full publication please see:

ECB Review Oct 2022.pdf