MNI WATCH: ECB Hikes 25Bp, Signals Peak May Be Near

The European Central Bank hiked key interest rates by 25bps on Thursday following stronger-than-expected price rises, but reported a significant downward revision to the medium-term growth outlook and signaled rates may have peaked.

The ECB’s tenth rate rise in a row was backed by a “solid majority” of Governing Council members, though some governors would have preferred to pause before taking the deposit rate to 4.0%, President Christine Lagarde told reporters (see MNI ECB WATCH: Tricky Data Makes Rates Decision A Close Call).

Markets had been divided over whether the ECB would raise rates or settle on a 'hawkish pause,' though MNI had reported that monetary policy hawks were gearing up for a final push (see MNI SOURCES: Hawks Aim For ECB Hike Before Data Ties Hands).

"The fight that we are leading against inflation is making progress. What we are doing today is trying to reinforce that progress,” ECB president Christine Lagarde said, adding that attention may now shift to how long rates remain elevated.

September’s decision came as staff macroeconomic projections put average inflation at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025 - reflecting mainly increased energy prices – and with inflation only dipping below 2% in the fourth quarter of 2025.

But while stressing that future policy moves remain tied to incoming data, the Governing Council signalled that September’s rate increase may be the last of the cycle, having reached levels that, “maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.

DATA-DEPENDENCY

Asked by MNI whether this implied a contradiction with data-dependency, Lagarde replied in the negative.

“Data dependency applies to both the determination of being sufficiently restrictive and length of time. We don't see any contradiction; one will drive the other," she said.

Monetary policy continues to be transmitted forcefully and more rapidly than in the past via lending channels in particular, Lagarde said, pointing also to tentative signs that profit margins may be starting to absorb strong upward wage pressures.

The outlook for growth was revised downwards, from 0.7% in 2023 to 1.0% in 2024 and 1.5% in 2025, with risks tilted to the downside. "We are clearly in a period of slow and sluggish growth,” Lagarde said, “but [...] the difficult times are now. We are confident that growth will pick up in 2024."

The Governing Council did not discuss actively selling bonds bought under its Asset Purchase Programme, nor was there talk of bringing forward the commitment to terminating reinvestments from the Pandemic Emergency Purchase Programme before the end of next year.

Lagarde was clear that losses incurred on excess liquidity held by some national central banks as a result of recent rate rises had played no part in the ECB’s decision-making process.