The last ECB decision saw a hike by 50 bps as expected taking the rate up to 3.50%. Now, what was interesting was the shift in forward guidance from the ECB. In December’s meeting, the ECB had raised expectations of three back-to-back 50bps hikes with one in February, one in March, and one in April. However, the ECB changed that messaging to now only expecting a 50bps hike in March. April is no longer seen as a definite hike. Instead, the ECB will ‘evaluate the subsequent path of its monetary policy’.
The ECB reached the decision easily
It was reported that only a small minority felt it was too soon to commit to a March hike worry 50bps. Some policymakers saw the terminal rate at 3.50%, while others saw further hikes through the summer to even higher levels. The 3.50% terminal rate level is roughly in line with what the market is expecting with STIR markets seeing a 3.42% peak for July.
After the meeting expectations dropped for a 50bps hike at the next meeting in March. It is now seen as a roughly 50/50 split whether the ECB hike by 25 bps or 50bps in March.
Confusion over the press conference, but it’s all about compromise
Christine Lagarde was reported as offering more confusion than clarity in the press conference, but ultimately the EURUSD fell lower out of the decision. If you read the Q&A in the press conference you can see that Lagarde is trying to balance competing views with the GC and coalesce around a central solution. With contradictory answers to evolving question, it is only logical that you could get confused. However, it does mean that data will continue to be very important for the ECB and especially growth and inflation data. Have a read of the press conference here and you will see that journalists want a clear-cut answer following a single clear logical line. These couple of lines were telling from Lagarde: “Any decision is the fruit of a compromise, and the beauty of the Governing Council is that all governors are passionate about the rationale, the analysis, the hard econometric work that is behind what we do. And some take particular views; others, other views”.
This was largely due to a more balanced inflation and growth outlook than has been noted previously, so the chances of the ECB doing less on the hiking front than in December have increased. This weighed on the EUR out of the meeting and was helped by the recent USD strength post stellar jobs and US ISM services print. Read the full ECB decision here. Read the press conference here.