ECB hikes interest rates by 25bp
The ECB's recent interest rate hike of 25 basis points reflects a proactive approach to managing inflationary pressures exacerbated by geopolitical events, according to the latest analysis from **ING**. This marks the ECB's first increase since September 2023, adjusting the deposit rate to 2.25%. With inflation expected to trend towards 3.0% this year, the ECB appears committed to avoiding past mistakes of delayed action amidst rising prices; however, concerns over inflation's sustainability remain relevant. Market participants should note that this movement aligns with broader expectations of restrained economic growth projected at 0.8% in 2026. Per the full note, the ECB's approach is now informed by the lessons learned from its earlier inactions during the inflation surge of 2021-2022.
What the desk is arguing
The desk asserts that the ECB's decision to raise rates is a timely response to emerging inflationary pressures rather than a mere insurance move. Following Carsten Brzeski's commentary at ING, this hike indicates a clear shift in the ECB's stance, aiming to mitigate inflation before it escalates, particularly against the backdrop of geopolitical tensions affecting energy prices.
The context for this hike is underpinned by inflation forecasts, indicating a rise to 3.0% for 2023 and gradually declining to 2.0% by 2028. This suggests that while the ECB acknowledges current inflationary trends, it intends to manage expectations effectively to prevent a repeat of past missteps.
Where it sits in our coverage
As per our internal coverage, the consensus target for EUR/USD is 1.075, with a range between 1.04 and 1.12. Key firms include: - JPMorgan: Target of 1.10 for March 2026 - BofA: Target of 1.04 for March 2026
This view aligns closely with the broader market assessment, as the 1.10 target from JPMorgan is consistent with the ECB's hawkish pivot, signaling that our desk's position is within the target range but leaning towards the upper end.
How other firms see it
Firms like JPMorgan and Barclays support a similar outlook, suggesting a favorable interpretation of the ECB’s balanced stance. In contrast, BofA expresses a more cautious view, anticipating a tighter monetary environment may hinder recovery.
Traders should monitor the EUR/USD dynamic closely, given how changes in the ECB’s guidance might impact broader eurozone confidence and investor positioning against USD movements.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The ECB's 25bp rate hike marks its first move since September 2023.
- 02Inflation is projected to stabilize at 3.0% for 2023, highlighting ongoing pressures.
- 03The ECB aims to avoid past mistakes of delayed responses to inflation.
- 04Market participants should closely watch EUR/USD reactions to ECB communications.
Market implications
Attention should be directed towards the EUR/USD exchange rate, especially around significant levels near 1.075. With anticipated declines in inflation, any signs of a more dovish tilt from the ECB in future meetings could necessitate a reevaluation of this outlook.
Risks to this view
The primary risk lies in a sudden deterioration in inflation dynamics or economic growth. Geopolitical events or unfavorable economic data could trigger a pivot in ECB communications, undermining the current rate-hiking narrative.
Newer quick take Older quick take Quick take 13:30 ECB hikes interest rates by 25bp The European Central Bank just announced the first rate hike since September 2023 in an attempt to preemptively tackle increasing inflation and to demonstrate its inflation-fighting spirit The ECB has hiked rates by 25bp, as expected Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Carsten Brzeski Global Head of Macro Fighting the ghosts from the past. The ECB just announced the first rate hike since 2023, hiking interest rates by 25bp and bringing the main policy rate, the deposit rate, to 2.25%. According to the official communication, the rate hike decision was driven by increased inflation pressure due to the war in the Middle East.
Fighting ghosts from the past Officially, today’s ECB decision is the expected insurance rate hike and an attempt to stay ahead of the curve, as an inflation wave is clearly hitting the eurozone economy. Unofficially, however, we can’t shake the idea that the ECB is actually fighting ghosts from the past. Specifically, the far-too-late reaction to the inflation shock in 2021 and 2022.
Remember that at the time, the ECB dwelt for too long on the idea that an inflation surge driven by supply shocks was 'transitory' and could be looked through. If not for the experience of 2022, “transitory” could well be the label used today. So far, the increase in headline inflation has remained moderate.
And while the knock-on effects of higher energy prices on other prices, like transportation and food, will be hard to avoid, the latest survey-based inflation expectations have actually come down a bit. This relatively well-behaved inflation trajectory is also reflected in the ECB’s latest staff projections. Headline inflation is expected to come in at 3.0% this year, 2.3% in 2027 and 2.0% in 2028, slightly up from the March projections.
The GDP growth forecasts come in at 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028, slightly down for 2026 and 2027 compared with the March projections. Overall, not a forecast that immediately calls for aggressive rate hikes. Even as some critics argue the ECB risks repeating its 2022 mistake of reacting too late to an obvious inflation shock, the comparison with that period is flawed – not least in terms of fiscal stimulus and savings.
Back in 2022, eurozone inflation was already above 4% year-on-year when the energy price shock hit. The ECB’s infamous late reaction came with a first rate hike in July 2022, when headline inflation was actually above 8% YoY. Also, back then, less than 25% of the main inflation components had an inflation rate of less than 1% YoY.
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