The ECB delivered a 75bp rate hike, with the deposit rate raised to 0.75% from 0.0%, the main refinancing rate now at 1.25%.
At the same time, the initial statement said that the central bank expects to raise interest rate further, while regularly re-evaluating the policy path. Inflation is much too high according to the ECB and forecasts were lifted to 8.1% this year, followed by 5.5% in 2023 and 2.3% in 2024. Growth projections were cut to 3.1% this year, followed by 0.9% in 2023 and 1.9% in 2024. The inflation projection for 2024 is still above the ECB’s upper limit for price stability and we suspect that the uptick in consumer inflation expectations last week counterbalanced concern about the impact of slowing demand.
ECB decision was unanimous, despite the dovish comments from some ECB members ahead of the meeting. Lagarde admitted that there were different views around the table but highlighted that after the review of the staff projections and the jump in inflation over recent months, the decision was unanimous. Lagarde highlighted that inflation pressures are now more broadly based, even as energy prices remain the main driving factor. Against that background Lagarde stressed that “determined” action needed to be taken. So, after initially moving very slowly on policy normalization, the hawkish camp has now stepped up to the pressure and forced the hands of the doves even as the risk to the growth outlook are primarily on the downside. Lagarde hinted that neutral rate is not necessarily the end rate of the current tightening cycle, with more to come at upcoming meetings, although she remained open on the magnitude of further moves.
US initial jobless claims dipped -6k to 222k in the week ended September 3, the lowest since late May. It follows the -9k decline to 228k (was 232k) in the August 27 week. Despite the recent declines, claims have generally been on a big 5-month climb since hitting the 53-year low of 166k in March.
Fed Chair Powell defended the hawkish stance and continued to stress the need to act “forthrightly” and proactively to bring down inflation to the 2% goal. He is speaking at the Cato Institute. Powell also cautioned against prematurely loosening policy. He vowed the Fed will not be distracted by “external political considerations” and will keep going until the job is done. So far the evidence suggests longer term expectations are anchored close to the 2% level, though shorter term expectations are higher. Inflation would not have been so high were it not for the pandemic. The FOMC is seeking to slow growth below trend to reduce inflation, which also will help rebalance the labor market.
EURUSD initially breached parity to 1.0030 highs as the ECB decision broke, during the Lagarde press conference the pair spiked down to 0.9930 before lifting back to 0.9950. Parity remains the key pivot point as Fedspeak goes into lockdown ahead of Tuesday’s CPI data and the FOMC meeting September 20/21.
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