MNI ECB Review - September 2023: Shifting Focus To Persistence of Policy Rate Setting

MNI ECB Review - September 2023: Shifting Focus To Persistence of Policy Rate Setting

Going into the September meeting there were two likely options for the ECB – hike by 25bp or leave policy unchanged. There were also two potential core messages: the hiking cycle has concluded, or there is still scope to hike further. With the most hawkish scenario being a 25bp hike combined with a tightening bias and the most dovish being a hold coupled with indications that the hiking cycle has ended, we opted for the middle ground of a hold combined with indications that rates could still go higher, which would give the ECB the most optionality. In the end, the ECB hiked by 25bp and indicated that rates have likely peaked.

We would argue that it is difficult to perfectly calibrate monetary policy in real time and determine that such a modest hike would make the difference between meeting and not meeting the inflation objective. That the ECB hiked by 25bp and signalled that rates are likely at the terminal level could suggest the ECB thinks otherwise, and has higher conviction that it has tailored monetary policy effectively for the current economic situation. Perhaps more likely given that the decision was made by a ‘solid majority’, this was a compromise decision. For the dovish members, a further hike was the cost for signalling that the ECB is unlikely to move rates any higher, while for the hawkish members they received another hike and could push for action later in the year if inflation surprises higher.

ECB Review September 2023.pdf