" In particular, "interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission."

Moreover, the ECB has revised UP their 2024 HEADLINE INFLATION forecasts (from 3.0% to 3.2%), a level far 
from being consistent with their single mandate’s target  (2%). That basically left no choice today for the ECB but  to continue to hike, even if this appears to be a clear negative risk for growth given the ongoing slowdown (we note however that 2024 CORE INFLATION has been revised DOWNWARD from 3.0% to 2.9%) Meanwhile, the ECB revised its GDP growth forecast for 2024 DOWNWARD, from +1.5% to 1.0%.

Given the most recent dynamics, this still appears relatively optimistic as it rules out the prospect of a recession, despite most coincident indicators being already in “recession territory”. With regards to PEPP purchase the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024 (as they probably want to keep BTP-Bund spread under control)

She left the door open to potential additional rate hikes if necessary to bring the inflation trajectory to target. She explicitly ruled out any potential reversal in rates, saying that the word “rate cut” hasn’t even been pronounced during discussions. She mentioned that the duration of the restrictive monetary policy stance will be important.

Yesterday’s decision was probably a difficult one to take for the ECB, as the risk for the central bank to be blamed for causing, or amplifying, a recession appears elevated and might tarnish the ECB’s perception across the population and several European governments. Let’s hope that this isn’t another “Trichet moment”, like in July 2008, when the ECB hiked amid an already severely slowing economy, only to have to reverse course in a few months later.

In any case, the combination of an ECB still in restrictive mode, and of the ongoing negative growth dynamics, is not encouraging for the Eurozone outlook in the months ahead and next year.  

Our scenario for ECB rates is that this was likely the last hike of the cycle and that short term rates will now be held at current levels until there are clear signs that inflation is slowing down. However, given the tone of Ms. Lagarde’s conference, one cannot completely rule out one more rate hike, if inflation remains too high and doesn’t slow down. Rate markets are pricing a small chance of this happening at one of the two remaining ECB meeting this year. If that were to be the case, our view is that it would only reinforce the downside risks around the 2024 Eurozone growth outlook.