ECB Raises Rates by 25 bps, Pledges to Hike Further

EUR/USD has been showing bullish momentum recently on USD weakness, as the FED delivered the last rate hike worth 25 basis points (bps) yesterday. Today the European Central Bank (ECB) held its meeting as well and raised interest rates by 25 bps as well. President Christine Lagarde appeared in the press conference after the meeting, saying that the ECB is not pausing with rate hikes, which should have been bullish for the Euro but it has ended up lower after the hike.

ECB Announces Their Latest Monetary Policy Decision – 4 May 2023

• ECB raises key rates by 25 bps in May monetary policy meeting, as expected
• Main refinancing rate 3.75% vs 3.75% expected
• Prior refinancing rate was 3.50%
• Deposit facility rate 3.25% vs 3.25% expected
• Prior deposit facility rate was 3.00%
• Marginal lending facility 4.00%
• Prior marginal lending facility rate was 3.75%
• Headline inflation has declined over recent months, but underlying price pressures remain strong
• Past rate hikes are being transmitted forcefully to euro area financing and monetary conditions
• The lags and strength of transmission to the real economy remain uncertain
• Interest rates remains ECB’s primary tool for setting monetary policy stance
• Future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive
• ECB stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission
• Full statement

There’s nothing in it that I would consider as being too much of a surprise but the addition of the phrase that a few more rate hikes will bring policy to “levels which are sufficiently restrictive” points to the fact that they are nearly done. But we all know that already.

The euro has dipped slightly on the decision, with EUR/USD tumbling lower from 1.1075 to 1.0990 but that seems to just be some quarters disappointed that there was no 50 bps surprise. Otherwise, this is pretty much a straightforward decision and statement. The ECB president Christine Lagarde also sounded hawkish, saying that the inflation outlook continues to be too high and too long and they “are not pausing, that’s very clear”.

EUR/USD Live Chart