5 takeaways after yesterday’s ECB decision and presser

This week was marked by two central banks announcing their monetary policy (the Reserve Bank of Australia and the European Central Bank), ahead of the Federal Reserve next week. If we exclude the US inflation data, due a few hours from now, we might say without a shadow of a doubt that yesterday’s ECB meeting was the main event of the week.

The meeting took place in beautiful Amsterdam, the Netherlands. It was the first meeting after March that showed a sense of normality as COVID-19 pandemic slowly fades away.

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By the end of it, some traders were disappointed, some others not – it depends on which side of the market they were. One thing is sure, though. The market did not like the ECB’s message, and the EUR/USD exchange rate dropped by about 0.6% towards the end of the European session.

What’s to like? A quick look at the outcome following the presser, and one may say that it was the worse possible outcome the ECB might have expected: rates higher, euro lower, peripherals wider, and Stoxx lower.

Regardless of what the ECB did or did not want to see as an outcome, here are five key takeaways after yesterday’s interest rate decision and press conference:

• 25bp rate hike comes in July
• Another rate hike comes  in September
• Data-dependent flexible approach beyond September
• APP ends July 1^st
• ECB staff projections show headline inflation at 2.1% in 2024

Tightening begins with a 25bp rate hike in July

Some market participants already expected the ECB to hike the rates at this week’s meeting. However, it chose the safest option, the less hawkish one if we may say so, by pre-committing to a 25bp rate hike in July.

In the words of the previous ECB President, Mario Draghi, the ECB “never pre-commits.” This came to an abrupt end yesterday.

Another rate hike follows

Moreover, another rate hike follows at the next meeting in September. Only this time, the ECB does not know if it is a 25bp or a 50bp rate hike.

It all depends on inflation and what the trend is over the summer.

Wait-and-see approach beyond September

Beyond September, the ECB prefers a wait-and-see approach. Truth be said, the horizon is long enough to grant the central bank the option of evaluating the upcoming data before deciding on its next move.

APP ends July 1^st

Bond-buying ends on July 1^st as the APP or Asset Purchase Programme ends.

2024 headline inflation above ECB’s target for the first time ever

Perhaps the most interesting thing yesterday was the ECB staff projections about future inflation. The staff sees HICP inflation above the ECB target for the first time ever – at 2.1% in 2024.

Also, staff projections were included in the press release, something that was never done before. How and if these projections will change will be the key driver of the decision the ECB will take in September.