Economic News

ECB Hike 50bps but Euro Slips

ECB Hike 50bps but Euro Slips

Dovish rate hike by ECB
EUR falls across the board
Attention turns to Lagarde at ECB presser

The ECB had set itself up to disappoint some market participants after talking up 50 basis points. As it turned out, and despite all the troubles in the banking sector, it stuck to script and delivered that 50-bps hike. Initially, the euro rose a tiny bit, but then it slumped. The DAX hit a new weekly and multi-month low, before bouncing back a little off its worst levels. Keep an eye on the EUR/JPY, which could drop to a new low for the year in light of the risk off sentiment.

Traders realized that this was the best ECB could have done in these circumstances. By not hiking and going back on their words, this would have seen the ECB lose some credibility. It had to hike. But here is the clever bit: the ECB also didn’t want to disappoint those who were calling for a smaller or no rate hike at all. So, it provided no forward guidance or commitment to future hikes. It said that “the elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decision”. In other words, this was as dovish a rate hike as you would have seen in these circumstances.

In addition to providing no forward guidance, it said that it has the toolkit to provide liquidity support if needed and that it is ready to respond to financial and price stability risks.

But the ECB could deliver more rate hikes, if the financial stability risks subside. It hasn’t ruled out the chance for more rate hikes.

Indeed, inflation remains uncomfortably high, which may require further tightening down the line. The recently released Eurozone inflation data barely slowed in February. Headline CPI eased a tad to 8.5% annual pace but remained above expectations of a slowdown to 8.3%. Meanwhile core CPI accelerated to a fresh record high of 5.6% from 5.3%. Core inflation is the key focus for the ECB and the fact that it rose further warrants even more tightening.