After 10 Straight Hikes, ECB ‘Pauses’ (As Expected); Warns “Inflation Still Expected To Stay Too High”

After defying expectations at the previous meeting (and hiking), The ECB – as expected this time – ‘paused’ their interest rate hiking cycle (following 10 back-to-back hikes), leaving the headline deposit rate at 4% amid growing fears of recession for the 20-nation economy.

Echoing The Fed’s parlance, Christine Lagarde is signaling ‘high for long’ and the market – for now – is pricing in this pause lasting through Q4 2024…

“The Governing Council’s past interest rate increases continue to be transmitted forcefully into financing conditions. This is increasingly dampening demand and thereby helps push down inflation.”

Source: Bloomberg

Also echoing its Eccles Building pals across the pond, The ECB reiterated in its statement that holding borrowing costs at that level for long enough will make a “substantial contribution” to bringing consumer-price gains back to the 2% target.

The ECB is also careful to leave the door open open to further hikes, should inflation fail to ease quickly enough, confirming its data-dependent approach

“The incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook,” the Governing Council said.

“Inflation is still expected to stay too high for too long, and domestic price pressures remain strong.”

The ECB offered no update to its plans for the €1.7 trillion ($1.8 trillion) bond portfolio, maintaining its intent to reinvest payments from PEPP until end of 2024.

• The future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

• The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.

Overall, very much as expected from the ECB.

Hawks still outnumber the doves…

Jamie Rush, Chief European Economist for Bloomberg Economics, has this to say:

These moves “create a modest further tightening of financial conditions in the euro area and together with a deteriorating outlook for the economy underscore the need for the ECB to tread carefully at its October meeting. We doubt there’ll be much talk of a further hike in December.”

From the press conference we look for commentary from Lagarde on the recent energy price upside and potential inflation ramifications, EZ’s growth outlook and whether there were any discussions around altering APP/PEPP and the MRR. as some had suggested could occur at this meeting/in 2024 (due to begin at 0845ET):

Read the full ECB Redline below…