ECB hikes interest rates again, flags March increase

EUROPE-ECB-INSTANT-VIEW:ECB hikes interest rates again
EUROPE-ECB-INSTANT-VIEW:ECB hikes interest rates again Copyright Thomson Reuters 2023
By Reuters
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The European Central Bank on Thursday lifted its deposit rate by another half a percentage point to 2.5%, its highest level since November 2008.

Rates have risen from a record low of -0.5% in July as the ECB responded to soaring inflation, which now show signs of easing.

The ECB signaled another half a percentage point increase for March, pressing ahead with policy tightening even as some global peers are slowing down.


FOREX: The euro traded at $1.0983, a touch lower from where it stood before the ECB‘s rate decision and just off 10-month highs hit earlier.

BONDS: Government bond yields across the euro area were lower, a move that also coincided with a drop in UK gilt yields after a Bank of England rate decision earlier. Germany’s 10-year Bund yield was down 16 basis points at 2.14%. Italian yields were down 26 bps at 4.05%.

STOCKS: The broad euro STOXX 600 index was last up 0.9% on the day.



“Central bankers keep talking about data dependency but, while it is the real deal in the U.S., the ECB’s interpretation of the phrase is a little mystifying. It hasn’t just provided forward guidance, it has actually committed to raising policy rates by 50 basis points again in March.

“Certainly, the inflation problem is still more pressing for the Euro area, with core inflation still stuck at record highs.

Furthermore, with the economy looking to be already emerging from its slowdown, in the absence assertive ECB action, it is maybe reasonable to expect a renewed rise in price pressures.

“Even so, with several weeks until the next meeting, a whole host of economic data to dissect between now and then, not to mention a new set of forecasts to be unveiled in March, perhaps the ECB should have given itself a little flexibility?”


“The European Central Bank has followed the Bank of England in delivering a 50bps rise in interest rates as it too continues to battle against inflation. However, where the ECB differs from other central banks is the fact it is much further behind in its hiking cycle and as such still has some way to go before it can think about pausing or pivoting. So much so it has already committed to a 50bps rise in rates at its next meeting in March, before it begins to reassess.

“European economies are holding up okay in the face of inflation and rising rates, but the spectre of recession remains ever present in today’s environment. Given there is a chance the ECB may still be raising rates while others can pause and take a breath is not an ideal scenario for the region. With conflict in Ukraine persisting, the recent fall in energy prices has not been enough to help bring down core inflation, and this is what the ECB will be watching closely as it tries to get back on to a path of normal monetary policy. It is more exposed to the ramifications of Russia’s invasion of Ukraine, and for as long as that continues to bring economic issues, Europe will suffer more heavily as a result.”


“It’s telling that German yields are lower, suggesting the market is anticipating we may well yet see a reversal in policy sooner rather than later as policy suddenly veers back to supporting growth. That, for me, is why we are seeing equities higher. I am not sure the markets are fully buying into the longevity of this continued hawkish stance.” 

“The ECB delivered the 50 bps as expected, but surprising that it communicated today another 50bps in March! Suggests the ECB is in a much more hawkish place than is the Fed or BoE at the moment.

“I can understand why the message we are getting from the ECB, ie that inflationary pressures are still too high, suggestions that growth is holding up, and therefore further tightening is needed. But the reaction we are seeing in the euro, as indeed we saw for sterling, suggests concerns that the ECB‘s actions may drive the economy into recession.”


“What was a bit of a surprise was the pre announcement for the next meeting. The signal is pretty clear that they’ve got one more rate rise and then they could opt for smaller ones or they could stop all together. They’ve basically given themselves an opportunity to stop at that point (in March).

“That is interesting because in the past they haven’t opted to pre-announce future decisions.

“They were some people that thought that because the economy had performed better than expected, the ECB would have to raise rates even higher that what had been expected.

“But the messaging from the ECB today seems to be quite confident in the progress that has been made and could potentially pause from March onwards. That would upset the more hawkish players in the market.”


“They are trying to take any kind of uncertainty out of the market. The ECB is settling the debate about March.

“Headline inflation has come down a bit and core inflation has gone up a bit, so I don’t see any surprises in the statement.

“We got what was indicated in December and they will reassess in March when they release latest macro forecasts.”

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