As the ECB meeting concluded yesterday, our clients from Lunaro Markets Limited and Elevate Financial Services have shared their reactions.
James Wright, Senior Trader, Lunaro Financial Services Limited
As expected, the ECB hiked 25bp, taking the deposit rate to 2.50%, its second move of this cycle. The more telling bit came after, when Lagarde said she couldn’t anticipate the next move and gave markets nothing on timing either way. That’s deliberate; the Council isn’t boxing itself in while the Middle East-driven energy shock keeps feeding through prices.
Worth noting too, the ECB nudged its growth forecast higher rather than lower, which tells you this was a hike from a position of confidence, not reluctance. With no steer either way, every inflation print and how energy prices behave will carry more weight than usual between now and year-end, and the euro and yields will do the talking instead.
Madhur Kakkar, Founder and CEO, Elevate Financial Services
The ECB delivered the expected 25 bp hike, taking the deposit facility rate to 2.50%, but the message was clearly that the central bank is not ready to look through the energy shock. Lagarde acknowledged that the recent rise in inflation has been driven mainly by energy, while underlying pressures and wages have so far remained relatively contained. However, with inflation now expected to stay above target for an extended period, the ECB has chosen to act before those pressures become more entrenched.
My view is that today’s move is a precautionary hike rather than a commitment to an open-ended tightening cycle. The ECB has kept the door open to further action, but its next step will depend on whether higher energy costs begin feeding through into wages, services and inflation expectations. The bigger challenge for Europe is that inflation risks remain tilted higher even as risks to growth are on the downside, leaving the ECB to protect its credibility without unnecessarily weakening an economy that has so far proved more resilient than expected.
