News: EUR 2022-12-15 23:10

ECB slows rate hike pace but ratchets up hawkishness

All good things come in threes…after the Federal Reserve and Bank of England, the European Central Bank has followed with a rate hike of 50bp. The ECB also announced it would start to reduce its bond portfolio, aka quantitative tightening, from March 2023 onwards

Ahead of today’s meeting, the question was whether the ECB would opt for a larger-sized rate hike with a dovish message or for a smaller-sized rate hike with a hawkish message. The answer is clear: a smaller hike with a very hawkish message. In particular, the following phrases were surprisingly hawkish: “interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift”.

As regards the reduction of the ECB’s bond holdings, the reinvestments of maturing bonds under the asset purchase programme (APP) portfolio will decline to €15 billion per month on average until the end of the second quarter of 2023 “and its subsequent pace will be determined over time”.

The ECB also already published the results of its latest macroeconomic projections, expecting inflation to come down to 3.4% in 2024 and 2.3% in 2025. The 2024 number was revised upwards significantly. At the same time, the ECB expects only a short and shallow recession, forecasting eurozone growth to come in at 0.5% in 2023 and 1.9% in 2024. This is much more optimistic than our own growth forecast.

All in all, the ECB’s crusade to not only fight inflation but to fight against any deterioration in its reputation and credibility continues. There is still very little the ECB can do to bring down actual inflation but it can contribute to re-anchoring inflation expectations. With today’s announcement, it is clear that the ECB wants to first fully exploit interest rates as the main instrument to fight inflation and that the balance sheet reduction will stay on the back burner. Needless to say that with the still relatively optimistic growth outlook, the risk increases that the ECB pushes the eurozone economy further into recession with every new rate hike.
Recent events
2023-01-25 14:03
News 404
German Ifo index improves again in January

Germany’s most prominent indicator has improved for the fourth month in a row, but the renewed optimism is still based...

2023-01-18 18:56
News 777
US production plunge adds to fears we could already be in recession

Coming on the back of the weakness in retail sales, the steep drop in industrial production and news of more job lay-off...

2023-01-18 18:54
News 789
Fed reaches the end game as US data disappoints yet again

Widespread falls in key retail sales components and broadening signs that inflation pressures are rapidly moderating mea...

2023-01-18 18:53
News 700
Bank of Japan defies market speculation; keeps policy steady

In keeping its key rate and yield curve control policy unchanged at today's meeting, the Bank of Japan probably wanted t...

2023-01-18 18:51
News 647
Jump in UK services inflation provides ammunition to BoE hawks

Headline inflation has peaked but pressure from the service sector continues to build. That's likely to tip the balance ...

2023-01-13 19:09
News 769
German economy still defies recession

The German economy grew by 1.9% in 2022. This implies a stagnating, not contracting, economy in the fourth quarter. Will...

2023-01-13 19:06
News 816
China’s export contraction means more infrastructure spending to support recovery

China's exports and imports continued to contract in December. This signals weak external demand which could hamper the ...

2023-01-09 14:37
News 946
German industry stagnates at too low level

Industrial activity in November provided more evidence that the economy did not fall off a cliff in the fourth quarter b...

2023-01-05 11:46
News 1444
German exports weaken further in November

Exports continue to weaken, suggesting that recession fears are real

German export weakness continues. Ge...

2023-01-04 22:51
News 1547
US jobs numbers could soon start to turn

Today’s data offers further further evidence that labour demand remains strong despite clear signs of a weakening econ...

2023-01-04 14:30
News 1495
German inflation drops to 8.6% in December

Lower oil and gasoline prices and the first phase of the government's gas price cap have pushed down headline inflation ...

2022-12-31 15:36
News 1741
BOJ considering raising inflation forecasts to near 2% target -Nikkei

The Bank of Japan (BOJ) is considering raising its inflation forecasts in January to show price growth close to its 2% t...

2022-12-30 12:04
News 812
South Korea: CPI inflation unchanged in December

Entering 2023, we expect headline CPI to head down to 4%. Gasoline prices and utility fees are set to rise meaningfully ...