4 takeaways after the ECB hiked policy rates by 75bp for the second time ever

The European Central Bank (ECB) hiked policy rates today by 75bp – the second time on record. In doing so, the central bank is frontloading rates ahead of challenging times ahead.

During the press conference that followed the interest rate announcement, President Lagarde reiterated the central bank’s willingness to tighten the monetary policy despite the war in Ukraine and elevated energy prices.

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Out of everything the ECB did and said today, we could highlight four things:

• Today’s decision to hike the key interest rates by 75bp is historic
• ECB does not see a recession
• Inflation remains central to ECB’s concerns
• More rate hikes to follow

Historic decision taken by the ECB

Today is the first time ever the ECB hiked the policy rates by 75bp. Technically speaking, the central bank did it again in January of 1999, but that is considered an exception as it was designed to facilitate the creation of the euro money market.

In any case, whether you’ll consider today’s rate hike the first or second one ever, the decision to move rates in such a manner is historic nevertheless. First, the size of the rate hike is unusual. Second, the ECB leaves zero rates behind after many years of keeping them there or even below (e.g., the deposit facility rate was held in negative territory for several years).

ECB revises down growth forecasts but no recession in sight

In other positive news for the euro, the ECB announced its growth forecasts. While it revised them down, it still does not envision a recession.

The economy is expected to grow by 0.9% this year.

2022 inflation forecast raised to 8.1%

Inflation is a major concern for the ECB. During the press conference, Lagarde mentioned that the previous ten monthly readings were unusually high, which is why the ECB decided to be bold about hiking the rates.

Moreover, the central bank has now revised inflation forecasts higher. As such, the staff’s inflation projections show 5.5% in 2023 (up from 3.5%)

Further rate hikes are expected at the next several meetings

The ECB is committed to acting on a meeting-by-meeting basis. However, it did signal further rate hikes to follow.

Therefore, one may say that the ECB is determined to protect price stability in the euro area despite the present geopolitical and economic challenges.

Euro reacted negatively to the otherwise hawkish ECB tone. The main exchange rate, the EUR/USD fell about 50 pips, dragging down other EUR pairs as well.

However, it is still early to tell if this is the only reaction to today’s ECB decision. Traders will have better clues by the end of the trading week and the start of the upcoming one.