Summary
In line with our expectations, the ECB delivered a +25bps hike to bring the deposit facility rate to 3.25%. APP reinvestment will cease in its entirety from July.
The tone of the presser was hawkish. Lagarde repeated explicitly that the ECB was not pausing and signalled the potential for multiple further hikes from here.
The ECB sees the stance of policy as restrictive already, but Lagarde emphasized that more is still to be done. We also see policy as tight overall, and review signs of tightness from the April Bank Lending Survey and monetary policy metrics.
We revise our ECB subjective probabilities hawkish – we now expect 2x additional 25bps hikes for a terminal rate of 3.75% and assign a meaningful probability to an even more protracted hiking cycle.
Rates: +25bps, Hawkish Skew
In line with our expectations and the consensus view, the ECB raised its policy corridor by +25bps at the May Governing Council meeting, bringing the deposit facility rate to 3.25%. Going into the meeting we had assigned a heavy tail risk to a +50bps clip. Lagarde’s commentary during the presser stated that a minority of members would have supported a +50bps hike at this meeting, with all members deeming further tightening appropriate:
“As to the exact amount, by how much we increase rates, as I said in my introduction in the response to the first questions, there were a variety of views. Some governors suggested that maybe 50 [basis points] was appropriate, others believed that 25 was appropriate. I didn’t hear anybody suggest that zero would be appropriate, which confirms to you that this is a hiking journey that we are on and it will continue to be so. But at the end of the deliberations and having had a chance to confront our views and answer the questions and really put everything in perspective, there was a general and very strong consensus behind the decision that you have in front of you.” – Lagarde, May Presser
Decision Text: Implicit Direction Very Clear
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