ECB's Lagarde Rules Out A Pause As Inflation To Stay 'Too High For Too Long'

The European Central Bank raised its three key interest rates by a quarter basis point on Thursday, as widely expected, with policymakers assessing that the inflation outlook in the euro area remained “too high for too long” and ECB President Christine Lagarde signaled more rate hikes ahead.

The Governing Council raised the main refinancing rate, or refi, by 25 basis points at 3.75 percent.

The deposit facility rate was lifted to 3.25 percent and the lending rate to 4.00 percent.

“The Governing Council’s future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2 percent medium-term target and will be kept at those levels for as long as necessary,” the ECB said.

“The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.”

Future policy rate decisions will continue to be based on the assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission, the ECB said.

The previous change in the interest rates was a half-a-point hike in March.

“We are not pausing, it’s very clear…..there is more ground to cover,” Lagarde said during the post-decision press conference.

Her assertion laid to rest the speculation in some corners that the latest rate hike might have been the final one in the current tightening cycle.

The US Federal Reserve, which raised interest rates by 25 basis points on Wednesday, gave signals of a pause ahead. Some observers had expected the ECB to follow suit.

Lagarde also revealed that some ECB policymakers had leaned towards a bigger hike of 50 basis points this month, adding that she did not hear any call for a pause.

“While today’s hike is the seventh increase in a row, it is the smallest in the current cycle, suggesting that the ECB has entered the final stage of this tightening cycle,” ING economist Carsten Brzeski said.

Brzeski called the latest hike “a dovish twist but a good European compromise.”

The bank expects to discontinue the reinvestments under the Asset Purchase Programme as of July 2023 and that move looked like a bargaining chip for hawks in order to agree to a 25bp increase instead of a 50bp hike, the economist said.

“…at current levels and given the lagged impact of monetary policy tightening both in the eurozone and the US, the risk is high that every single additional rate hike from here could turn out to be a policy mistake further down the road,” the economist added.

Markets have now priced in a maximum of two more 25 basis points rate hikes in the current tightening cycle, reports said.

Though headline inflation has eased in Eurozone, underlying price pressures in the single currency bloc remain strong, the ECB said.

The bank said the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain.

The ECB said that interest rates remained the primary tool for setting the monetary policy stance.

The bank expects to discontinue the reinvestments under the Asset Purchase Programme as of July 2023.

ECB Vice-President Luis de Guindos said the European banks are resilient and well capitalized.

De Guindos also said the European banking industry has been clearly outperforming the American one in terms of stress indicators.

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