Market Wrap – ECB HIKE BY 75 BASIS POINT

The European Central Bank hiked interest rates by 75 basis points as widely expected earlier, however, downbeat comments from ECB President Christine Lagarde.

Due to the pullback in expectations of further aggressive rate hikes from the ECB the euro currency has fallen below parity against the US dollar and also taken a hit against the British pound.

In summary, the ECB increased the main refinancing rate 2.00% vs 2.00% expected, the prior 1.25%. The deposit facility rate was raised to 1.50% as expected. The Marginal lending facility was raised to 2.25%

The ECB statement read that the ECB “Expects to raise interest rates further, to ensure the timely return of 2% inflation target” and “Inflation remains far too high and will stay above the target for an extended period”.

Additionally the TLTRO terms and conditions were recalibrated, and the ECB noted that they continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio.

The official ECB press conference revealed that Lagarde thought that more rate hikes were necessary. President Christine Lagarde downplays the need for more rate hikes.

She also cautiously noted during the main press conference that “Inflation remains far too high” and Consumer and business confidence has fallen rapidly”.

The ECB Governing Council also “Expect further economic weakening in remainder of this year and next year” and they “Expect economy to slow down substantially over remainder of the year”.

They also Cited weaker global demand and due to tighter monetary policy and that post-pandemic rebound in services demand is slowing. Risks to economic outlook noted to be “clearly on the downside”.

Lagarde also said that “Risks to the outlook inflation are primarily on the outside, led by retail energy prices” and “Bank lending to firms remains robust”.

Most telling was the comment from Lagarde that “Future decisions will continue to be data dependent and we stand ready to adjust all instruments”.