Market Insight – ECB Aftermath

The ECB raised interest rates by 50 bps during its last monetary policy meeting of 2022, marking a fourth-rate increase, following two consecutive 75bps hikes.

Also, the euro currency jumped as ECB President said that the central bank will be embarking on 50 basis point hikes for a considerable period of time.

Clearly, the message is that we will rise rates significantly. Lagarde said “We have more ground to cover, and we are in it for the long game”. This sent the EURUSD towards the 1.0700 handle.

That takes the deposit facility to 2%, the refinancing rate to 2.5% and the marginal lending to 2.75%, a level not seen in fourteen years. Policymakers also said rates are expected to rise further due to a substantial upward revision to the inflation outlook.

Inflation forecasts were revised higher, with average inflation seen reaching 8.4% in 2022 before decreasing to 6.3% in 2023. Inflation is then projected to average 3.4% in 2024 and 2.3% in 2025.

On the GDP front, the Euro Area economy may contract in the current quarter and the next quarter, owing to the energy crisis, high uncertainty, weakening global economic activity and tighter financing conditions.

Overall, the central bank now sees the economy growing by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024 and 1.8% in 2025.

During the speech, the ECB President Lagarde also cited high energy costs and tightening financing conditions as reasons for shallow recession. The initial market reaction was down in European stocks.

Lagarde also mentioned that “Growth is expected to recover as headwinds fade. “however “Growth expected to be subdued next year”. The forecast for better growth in 2023 was slightly better than hoped.

The ECB President also reiterated that “Price pressures are strong across sectors” and “Consumer energy subsidies pull down inflation now but will push it up later”.

Touching on currency effect Larged noted that the “Depreciation of the euro is feeding through to prices” and in general “Our stance will continue to be data dependent”.