ECB Predicts Big Step in March... "Will Assess Follow-up Path After Rate Hike"

0.5%P Increase Decided in February
Big Step Indicated for March as Well
Judged Insufficient Inflation Easing
Increase Rate Expected to Narrow from May

Christine Lagarde, President of the ECB
[Photo by Reuters]

[Asia Economy Reporter Lee Ji-eun] The European Central Bank (ECB) has implemented a big step (a 0.5 percentage point increase in the benchmark interest rate) for two consecutive months and has also signaled an additional hike in March. However, it stated that it will assess the subsequent path of rate hikes after next month, which the market interpreted as the end of rate hikes being near.

On the 2nd (local time), the ECB held a monetary policy meeting and raised the benchmark interest rate from 2.5% to 3%, executing a big step for the second consecutive time following December. Since starting with a 0.5 percentage point hike in July, marking the end of the negative interest rate era, the ECB has raised rates a total of five times so far.

The ECB plans to maintain the 0.5% rate hike in March as well. ECB President Christine Lagarde said that maintaining the big step next month is "not irreversible," but emphasized, "Unless in an extreme situation, I cannot imagine a scenario where we cannot take a big step."

The market evaluated the ECB’s guidance as more ‘aggressive’ compared to the U.S. Federal Reserve (Fed) and the Bank of England (BOE). Earlier, the Fed, acknowledging a slowdown in inflation at its monetary policy meeting the day before, lowered the rate hike to 0.25 percentage points. The BOE also took a big step for the second consecutive time in December, but removed the expression ‘forcefully’ raising rates from its statement.

The reason behind the ECB’s continued tightening is attributed to persistent inflation. The Eurozone’s Consumer Price Index (CPI) inflation rate peaked at 10.6% in October last year and has been declining to 8.5% in January this year. However, it still exceeds four times the ECB’s target of 2%.

Moreover, the January headline CPI inflation rate excluding volatile fresh food and energy remained at the same level as the previous month’s record high of 5.2%. President Lagarde explained, "There is sufficient basis (for the rate hike decision)" and added, "Deflation in the European region has not yet begun."

However, the ECB’s mention of evaluating the subsequent path alongside rate hikes has raised expectations that the tightening cycle may end soon. Major foreign media explained, "Market participants interpret this remark as implying that rates have reached their peak."

Experts expect the rate hike size to decrease in May. Mark Wall, an ECB-focused analyst at Deutsche Bank, said, "It is expected that the ECB will reduce the rate hike to 0.25 percentage points in May," adding, "Ultimately, rate hikes will stop at 3.25%, and rates are expected to hover around the current level until 2024."