ECB delivers largest hike in over 20 years

The ECB council decided to raise the interest rates by 75bps at the September meeting, enacting a largest single hike since 1999. While it slightly overshot consensus and market expectations, it did not come as a major surprise, according to Oxford Economics.

“The unanimous decision to hike by such a large amount confirmed that consensus within the council sits firmly on the hawkish side,” it said in a market update.

The council considered the move on interest rates to be another step in “frontloading” monetary policy tightening. “We think that this validates the expectation of smaller hikes going forward, although more 75bps moves cannot be ruled out completely given President Lagarde’s reaffirmation of the meeting-by-meeting approach to decision-making,” explained the economic advisory firm.

”That said, through validating the current market pricing of a scale and timing of hikes, she implicitly indicated that it is likely that another large move would translate into an earlier end of the cycle.”

The central bank expects another pick-up in inflation, to 8.1% y/y and 5.5% in 2022 and 2023, respectively. But importantly, the ECB does not foresee a recession next year in its baseline.

“We are less optimistic on the growth side,” added Oxford Economics. “This is one of the reasons why our inflation forecast for 2023 is roughly 1ppts below the ECB’s.”

The decision did not mention quantitative tightening (QT), although Lagarde dismissed the tool as “premature”.

“We think that it’s a reasonable stance, given that commitment to QT would be much harder to reverse than interest rate hikes,” the briefing noted.

“We stick to our call of a 50bps hike in October, followed by 25bps moves in December and February. In addition, we think that it would take a deep recession – or solid signs of underlying pressures weakening – to trigger an early ECB pivot.

“We therefore continue to expect this to happen in late Q1 2023, with risks around this forecast largely balanced.”