The European Central Bank (ECB) was raising interest rates and decided to go against the consensus and boost all three of its key rates by 25 basis points, bringing the deposit rate to 4.00%. This decision was made in response to a hawkish source, which was seen to be a little stale. The General Council currently believes that rates “have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” according to the statement that accompanied the announcement. In addition, “rates will be set at sufficiently restrictive levels for as long as necessary”.

No changes were made to the APP or PEPP’s other parameters, and the latter’s reinvestments are scheduled to last “until at least the end of 2024”. According to the accompanying macro estimates, inflation in 2023 was revised up from 5.4% to 5.6%, in 2024 it was lifted from 3.0% to 3.2% (in line with Reuters source reporting), and in 2025 it was dropped from 2.2% to 2.1% (still coming in slightly above goal). All of the growth estimates for 2023–2025 were decreased. Lagarde issued a warning during the follow-up news conference, predicting that price pressures would likely continue high and the economy would likely remain muted in the upcoming months.

The President said in the Q&A that although some members supported a halt in rates, today’s decision was supported by a “solid majority”; the breakdown of the opinions will be important information for market players. Lagarde pointed out that the GC has not talked about PEPP reinvestments in a follow-up query. In an effort to give the Bank some leeway, Lagarde clarified that she was not stating the ECB was at peak rates when asked about the trajectory of rates beyond September. The recent comments by ECB members such as yesterday’s Klaas Knot who said that the policy is in a good place now, are also confirming that they are done with rate hikes, which will likely keep the Euro soft.

The ECB Monetary Policy Accounts for the September Meeting

• Emphasis was also paced on upward revisions to headline inflation projections
• A pause would have given rise to speculation that tightening cycle was over
• Not hiking could also send a signal of ECB being more concerned about the economy than inflation
• Deposit facility rate around 3.75% to 4.00%, as long as it was understood as being maintained for a sufficiently long duration, should be consistent to return inflation to target
• Decision between rate hike and pausing was a close call but tactical considerations played a role as well
• Full accounts

If anything else, this just further solidifies the notion that the ECB are done. While the rate hike was meant to try and leave the door open to tighten further, the messaging after certainly did not convince anybody.

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