MNI WATCH:ECB Signals More Hiking, Raises Inflation Projection

The European Central Bank raised its deposit rate by 25bp to 3.5% on Thursday and signalled another quarter-point hike next month after revising higher its inflation forecasts.

President Christine Lagarde repeated last month’s assertion that the ECB has more to do to bring inflation back to target in a timely fashion, with June’s Eurosystem staff macroeconomic projections adding 0.1 percentage point to headline inflation across the forecast horizon versus March, to 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025.

“Are we done? Have we finished the journey? No. We're not at the destination,” Lagarde said. “Do we still have ground to cover? Yes, we still have ground to cover.” (See MNI SOURCES: ECB Seen Likely Hiking Twice More).

"Barring a material change in our baseline scenario, it is very likely that we will continue to increase rates in July,” she added.

Some of the tightening effect from previous decisions has been seen already, with financing conditions reacting “forcefully” to increases in interest rates, she said.

TERMINAL EXPECTATIONS

After the decision, markets began pricing in a terminal rate of around 3.85%, though Lagarde said that where the ECB stops is “something that we will know when we get there, it is not driving our analysis.”

Discussions within the Governing Council were “harmonious,” with members reaching a “very, very broad consensus” that indicators of underlying price pressures remain strong despite “tentative” signs of softening, she said.

There is as yet no evidence of a wage-price spiral in Europe’s tight labour market, she added.

The ECB will end reinvestments from the asset purchase programme in July, she confirmed, adding that this should proceed smoothly but that the ECB has the tools it needs to deal with any potential market turbulence. (See MNI INTERVIEW: ECB Could End APP Reinvestments In Q3 - Kazaks)

Core inflation, which averaged 6.1% in May, is now seen reaching 5.1% over the year before falling to 3.0% in 2024 and 2.3% in 2025. ECB staff revised projected GDP growth down by 0.1% in each of 2023 and 2024, to 0.9% and 1.5%, respectively, holding at 1.6% in 2025.