Late to the global interest-rate hiking party, the European Central Bank is trying to convince everyone that it will also be one of the last to leave.
With counterparts from the US to the UK sending out signals of waning aggression after drastic monetary tightening, euro-zone officials insist their own onslaught against inflation isn’t about to let up.
ECB President Christine Lagarde all but promised on Thursday to repeat a hefty half-point hike in March, with the prospect of more action thereafter.
While their justification is that underlying price pressures are no less concerning, and euro-zone tightening is also less advanced than peers, officials risk looking increasingly isolated as investors show growing confidence that the global inflation shock is fading.
That showdown may come to a head in just six weeks’ time, when policymakers have pledged to be similarly hawkish despite also vowing to be “data dependent” and to be taking decisions “meeting by meeting.” Their stance may start looking like a statement of faith if statistical releases and new quarterly forecasts due then don’t clearly justify such firm action.
“A lot of news can come between now and March,” Peter Praet, a former ECB chief economist, told Bloomberg Television. “I was surprised by the intention to increase by 50 basis points because I think, who knows what’s going to happen?”
In contrast to the ECB’s doubling down on half-point hikes, the Federal Reserve lifted rates by only a quarter point on Wednesday. Chair Jerome Powell did say the Fed would keep raising, but his rhetoric and a more upbeat inflation outlook opened the door for a rally in stocks and Treasuries.
Similarly, the Bank of England signaled Thursday that its own hiking may be drawing to a close. The Bank of Canada, which raised last week, now expects to stay on hold.
All those counterparts began lifting rates earlier than the ECB, and have raised by considerably more than the euro zone’s 300 basis points to date. Even so, a relatively synchronized turn in the advanced-world cycle hasn’t escaped the bloc — its inflation slowed more than expected in January, to 8.5%.
Lagarde cited underlying consumer-price gains, currently at a record in the history of the single currency, and the risk of wage pressures too as reasons to stay alert. But the market reaction, including what may turn out to be the largest drop in Italian 10-year yields for almost three years, suggests such hawkish rhetoric is starting to fall on deaf ears.
Pietro Reichlin, a professor of economics at Luiss University in Rome, reckons the ECB is right in its determination to defy the markets and “stay the course,” in Lagarde’s words.
“Inflation remains high in Europe and the economy is doing slightly better than expected, so the decision to keep raising rates and to pre-commit makes sense,” he said. “There’s a good argument for staying the course on further hikes.”
The ECB does also acknowledge that the price threat is starting to moderate. Lagarde said risks to the inflation outlook are “more balanced” than before.
Even so, she was adamant that investors should consider a half-point increase in March as more or less baked in. While not “irrevocable,” only “quite extreme” scenarios would divert the ECB from that course, she said.
New forecasts due in March, which will take account of far lower energy prices than previously assumed, and another monthly reading of inflation, are among the items of information that policy makers will have by then — even if they currently reckon it won’t change their decision.
The risk though is that, just like the ECB took some persuading to finally end its ultra-low-rate stance last July with its initial hike, its locked-in approach to further increases ties officials too far. Instructive is its experience of mistakes, witnessed in prior instances of aborted tightening in 2008 and 2011.
“The ECB should not be the last hawk standing,” said Holger Schmieding, chief economist at Berenberg. “It should stop soon. However the statement suggests they will most likely raise rates further in May.”