Lagarde keeps the door open for further ECB rate hikes
The desk interprets today’s press conference as a strategic signaling maneuver by the ECB, indicating a readiness to consider additional rate hikes in response to rising inflationary pressures. As President Lagarde noted, while the latest 25 basis point increase to 2.25% may seem modest, it effectively lays the groundwork against potential economic stagnation amidst broader inflationary concerns. Per the full note from ing-think, this shift is partly a response to past hesitations in tackling inflation, which Lagarde acknowledged. Given the ECB's historical context, traders should be mindful of the potential for further tightening if inflation dynamics worsen, especially as external geopolitical factors continue to reflect inflationary trends in Europe.
What the desk is arguing
The thesis posits that the ECB, through Lagarde’s remarks, appears poised to implement further rate hikes if inflation remains persistent. The recent 25bp hike, while incremental, underscores the ECB's commitment to addressing potential stagflation resulting from external shocks, particularly following the war in the Middle East and its implications for energy prices.
Thoroughly, the ECB's recent increase signals to the markets a shift in approach, emphasizing the importance of proactive rather than reactive monetary policy in fighting inflation. This cautious yet determined step aims to restore confidence amid inflation projections that remain 'broader and indirect', suggesting that market participants must prepare for a tightening cycle that could influence euro liquidity and pricing strategies moving forward.
Where it sits in our coverage
Our current consensus target for EUR/USD is 1.075, acknowledging the tightening rate environment alongside inflation concerns. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This outlook aligns well with our trading desk's bias towards upward movement in the EUR, especially if further hikes come into play, thus positioning us nearer to the upper bound of the spectrum.
How other firms see it
Several firms seem aligned with this viewpoint, including jpmorgan, who foresee further adjustments in the ECB's monetary stance. Contrarily, bofa presents a more hesitant stance, predicting potential weakness for the EUR if growth stagnates or geopolitical tensions escalate.
Traders should also remain attuned to movements in the EUR/USD pair, as it closely mirrors the expectations around the ECB's rate path versus the broader U.S. monetary policy landscape, especially considering inflation reports from both regions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Lagarde's remarks indicate a likelihood of further ECB rate hikes.
- 02The ECB is reacting more proactively to avoid repeating past mistakes concerning inflation.
- 03Inflationary pressures are becoming broader, shifting the ECB's focus to preemptive measures.
- 04Traders should be cautious of market positioning around the EUR in light of potential interest rate movements.
Market implications
The key level to watch is the 1.10 target set by **jpmorgan**, which may soon come under pressure if inflation prompts the ECB to act aggressively. Additionally, upcoming economic data reflecting inflation rates will be critical for tracking the trajectory of the euro's strength.
Risks to this view
A reversal in the ECB's approach could occur if economic data reveals signs of growth failure or significant geopolitical escalation, which may compel a reconsideration of further rate hikes. Additionally, any unexpected dips in inflation could reduce the urgency for the ECB to tighten further.
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.
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