MNI ECB Review - September 2022: ECB Front Loads

MNI ECB Review - September 2022: ECB Front Loads

As expected, the ECB hiked policy rates by 75bp at the September GC meeting, marking another significant turning point for monetary policy. During the press conference President Lagarde repeated numerous times that this marks a frontloading of policy rate tightening and that future interest rate hikes would be delivered in future meetings. She went on to elaborate that the timescale for further hikes would probably be more than two meetings and less than five.

Having gone against its own forward guidance on a 25bp in July by delivering a 50bp hike, subsequently dropping forward guidance altogether, and then seemingly going against Chief Economist Philip Lane’s proposed tightening speed that is “neither too slow nor too fast”, it is clear that the ECB has fallen in line behind the hawks on the GC. Moreover, Lagarde indicated that support for a 75bp hike was unanimous, indicating that the dovish voices previously calling for a gradual approach, must now also be concerned by the scale of the recent inflationary surge.

In our ECB preview we had argued that it could be a risky move if the ECB hiked by less than 75bp as it would beg the question ‘if not now, then when?’ given that inflation is getting closer to double digits and the main policy rate (at the time) was still at zero. Hiking by 50bp, for example, would have risked undermining the ECB’s commitment and determination to restore price stability in a timely manner. As it stands, the more hawkish pivot at the September meeting, including President Lagarde’s particularly hawkish rhetoric, signalled a very clear resolve to rein in inflation. Although Lagarde stated that 75bp hikes should not be considered the new normal, it is now clearly an open option, especially as the ECB president indicated that policy rates were still a long way away from the terminal rate.

For the full publication:

ECB Review September 2022.pdf