Lagarde keeps the door open for further ECB rate hikes

Articles Lagarde keeps the door open for further ECB rate hikes 15:24 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download European Central Bank President Christine Lagarde's comments at the press conference kept the door to further rate hikes open Carsten Brzeski ECB President Christine Lagarde at today's press conference in Frankfurt, Germany. A second rate hike after today’s decision now appears more likely The ECB has done it. Today, it became the first major central bank to increase interest rates as part of the fight against stagflationary pressures triggered by the war in the Middle East.

It opted for a 25bp hike, bringing the deposit interest rate to 2.25%. To be clear, this rate hike is more of a symbolic move to signal the ECB’s willingness and determination to avoid being too late in carrying out its policy response. It’s not a rate hike that will derail the eurozone economy, but a decision made with clear communication and reputation in mind; the risk of doing nothing and potentially falling behind the curve is larger than the risk of any adverse effects on growth from higher interest rates, as suggested by Chief Economist Philip Lane in a recent speech.

More stagflationary pressures in staff projections but no reason for aggressive hikes During the press conference, ECB President Christine Lagarde mentioned the broadening of inflationary pressures and indirect effects as the main reason for today’s rate hike. Still, we can’t shake the idea that the ECB is actually fighting ghosts from the past – more specifically, its reaction that came far too late in responding to the inflation shock in 2021 and 2022. Remember that, at the time, the central bank lingered 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 (e.g., transportation and food) will be hard to avoid, the latest survey-based inflation expectations have actually come down slightly.

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. Similar to our own forecasts, ECB staff expect inflation to drop below 2% in the second half of 2027.

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. However, these growth forecasts have not incorporated the recent downward revision of first-quarter growth, meaning that the risk to this growth outlook is even more tilted to the downside than the ECB currently thinks. Overall, this is not a forecast that immediately calls for aggressive rate hikes.

Were there any other signals during the press conference? During the press conference, Lagarde refuted the phrase ‘insurance rate hike’, claiming that today’s move was nothing of the sort. She did so with almost the same verve with which she rejected the idea of ‘stagflationary pressures’ as well as the comparisons with 2022 at the April ECB meeting.

On a more positive note, it seems as though someone, at least, follows our research. In all seriousness, the comment on the insurance rate hike suggests that today’s decision was not a ‘one and done’ hike but rather a shift of the ECB's starting position. The warning that inflationary pressures were broadening, as well as the emphasis on broadening indirect effects from higher energy prices, suggest that today’s rate hike is not yet the end.

However, at the risk of ending up on a blacklist at the ECB, what remains strange is the repetition of data dependency and a meeting-by-meeting approach in the context of the ECB's seemingly clear reaction function. Lagarde’s comments on the different macro scenarios added to the confusion, with the ECB President at one point even mentioning rate cuts. Maybe the best description of the central bank's reaction function is what Lagarde herself mentioned during the press conference: “It will be what it will be.” All of this means that a second rate hike after today’s decision, either in July or September, has become more likely.

Still, as long as the bond market is taking over the ECB's work to tighten the monetary policy stance, governments don't fuel an inflationary spiral with fiscal stimulus, and sentiment indicators remain weak, it’s hard to imagine that the ECB would really want to fight an exogenous supply shock with aggressive rate hikes at the cost of potentially worsening an economic downturn. Monetary Policy Inflation GDP Eurozone ECB Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.

Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Carsten Brzeski Global Head of Macro Carsten Brzeski is the Global Head of Macro for ING Research. Previously, he worked at ABN Amro, the Dutch Ministry of Finance and the European Commission. He is a 2019 JFK Memorial Policy Fellow… In this article More stagflationary pressures in staff projections but no reason for aggressive hikes Were there any other signals during the press conference?