The European Central Bank met economist expectations with a 75bps interest rate hike on Thursday, and signalled more hikes were on the horizon.
The ECB has been slow to tighten monetary policy, lagging behind the Bank of England and Federal Reserve who were quick to increase rates in the face of soaring inflation. The ECB’s base rate is now 1.50%, behind the Bank of England’s 2.25% and Federal Reserves 3.25%.
Rising inflation has pushed centrals banks into making difficult monetary policy decisions that could threaten economic growth as consumer face soaring energy costs and interest payments.
Today’s was broadly priced into markets as the ECB had little choice but to hike rates further to support the Euro.
The key detail of the announcement is the statement of further increases in the near future.
A statement from the ECB accompanying the hike read “over the next several meetings the Governing Council expects to raise interest rates further.”
This will pile further pressure on the Eurozone economy which was reflected in a weaker EUR/USD, down 0.7% to 1.0005 at the time of writing.
“The ECB has a difficult balancing act though as inflation continues to darken the economic outlook, meaning they are raising rates at a time when the economy could do with a more dovish stance,” said Dan Boardman-Weston, CEO and Chief Investment Officer at BRI Wealth Management.
“The growth outlook for Europe is gloomier than it has been since the dark days of Covid or the Eurozone crisis a decade ago, and we’re likely to see a material slowdown in economic activity through the rest of 2022.”
The prospect of higher rates usually supports currencies and today’s trade in the Euro suggests entrenched concerns about the health of the European economy.