(Bloomberg) — European Central Bank President Christine Lagarde said officials have an “open mind” on what to do next after lifting interest rates by another quarter-point on Thursday.
(Bloomberg) — European Central Bank President Christine Lagarde said officials have an “open mind” on what to do next after lifting interest rates by another quarter-point on Thursday.
A ninth straight increase since last July brought the deposit rate to 3.75% — as economists expected. Officials have flagged that their unprecedented hiking campaign is nearing its end as inflation abates, while still exceeding the 2% target.
“We have an open mind as to what the decisions will be in September and in subsequent meetings,” Lagarde told reporters in Frankfurt. “So we might hike, and we might hold.”
If the ECB does pause, Lagarde said it “would not necessarily be for an extended period.”
As she spoke, money-market bets for September put odds of another hike at less than 40%, having been about 50/50 earlier. Bonds gained, led by short-dated notes that are among the most sensitive to monetary policy. The German two-year yield fell as much as 12 basis points to 3.02%, while the 10-year yield fell 8 basis points to 2.40%.
The euro fell as much as 0.75% to about $1.10, with losses compounded by strong US economic data.
The ECB also set the remuneration of minimum reserves at 0% — a step it said would improve the efficiency of monetary policy.
“Future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary,” it said in a statement. “The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.”
Like in the US, where the Federal Reserve hiked rates on Wednesday, analysts and investors reckon the ECB is now at — or one step away from — a peak in borrowing costs. Officials in Frankfurt, though, must tread delicately as their tightening to date is increasingly felt. Growth in the euro-zone economy is precarious, while demand for bank loans has plunged.
- Follow the ECB TLIV blog here
While it usually takes 12-18 months for monetary-policy shifts to fully hit home, evidence is mounting that the effect of ECB’s yearlong bout of hikes is reaching firms and households.
Alongside the steepest-ever drop in demand for corporate credit in the euro area, the bloc’s top economy — Germany — is struggling to exit a recession. The continent’s services sector, meanwhile, is starting to wobble, following persistent weakness in manufacturing.
“The near-term economic outlook for the euro area has deteriorated owing largely to weaker domestic demand,” Lagarde said. “Over time, falling inflation rising incomes, and improving supply conditions should support the recovery.”
She described the outlook for consumer-price gains as “too high for too long.”
The hope is that slower economic expansion will damp inflation sufficiently — a so-called soft landing. But price pressures remain. Core inflation, a closely watched metric that excludes energy and food, quickened last month to match the 5.5% headline reading.
In the runup to this week, most ECB policymakers offered little guidance on where they see rates going beyond July — reiterating simply that whatever peak is reached will be maintained for an extended period.
Even traditionally hawkish officials including Bundesbank President Joachim Nagel and Dutch Governor Klaas Knot say September remains open and will hinge on data.
They may look to late-cycle experiences elsewhere. The Reserve Bank of Australia is widely expected to hike again in August after pausing twice, while the Bank of England responded to stubborn inflation with a half-point move in June having earlier slowed its pace. In Chile, the central bank may slash rates to ease recession risks.
One thing September will definitely bring for ECB officials is a fresh set of quarterly economic projections, which currently show inflation still exceeding 2% by end-2025. Closer to the meeting, Lagarde may also be better positioned to offer clues on thinking as she gives a speech at the Fed’s annual retreat in Jackson Hole in August.
–With assistance from Barbara Sladkowska, Harumi Ichikura, Sotiris Nikas, Christoph Rauwald, William Horobin, Bastian Benrath, Laura Malsch, Alexey Anishchuk, Kamil Kowalcze, Alice Gledhill, James Regan, Phil Serafino, Bryce Baschuk, Joel Rinneby, Sofia Gerace, Steven Arons and Kevin Whitelaw.
(Updates markets in fifth paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.