- All key interest rates increased by another 25 basis points, to record high levels
- l We maintain our forecast that this was the last rate increase in current hiking cycle
As expected, today the Governing Council decided to raise all key ECB interest rates by another 25 basis points, to the highest level in 22 years. During the 9 meetings since the last July the ECB has increased interest rates by 4.25 percentage points. This meeting, however, was the first one where Christine Lagarde has openly admitted that the risks – of too sticky inflation and too weak economy – are now evenly balanced.
During the press conference president Christine Lagarde refused (twice) to give hints on what decision is likely to be made during the September meeting. This was a clear indication that the Governing Council now sees both risks as evenly balanced and will act more cautiously. Christine Lagarde has admitted what we have been pointing out for quite some time now – monetary policy works with long lags but we already starting to see its transmission through all the channels. There are clear signs of transmission from monetary policy to financing conditions and lending and, more recently, transmission to real economy. The data will tell us how much ground the ECB needs to cover, but the time is on the ECB’s side now – past rate increases will continue exerting further pressure on financial conditions and real demand.
Market expectations regarding the September rate increase have been close to 50% during the recent weeks, and have dropped slightly during the press conference, reflecting the ECB’s cautious forward guidance. We maintain our forecast that the incoming data will support the decision to leave interest rates unchanged in September. Furthermore, we still think that macroeconomic environment will warrant interest rate cuts already in the first half of 2024.