ECB Hikes Rates By 25bps (As Expected), Warns “Inflation Continues To Be Too High For Too Long”

As expected (and fully priced-in), The ECB slowed its pace of rate-hikes, matching The Fed’s 25bps move yesterday, taking the key rate to 3.25%, after its preferred inflation measure eased for the first time in 10 months.

The hike comes with a warning that “the inflation outlook continues to be too high for too long.”

The Governing Council’s future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.

The ECB stresses its data-dependence:

The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.

In particular, the Governing Council’s policy rate decisions will continue to 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.

Lagarde and her lackeys also echoed The Fed’s comments on lagged reactions to policy:

“Past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain.”

The wording on T-LTROs is unchanged from last month. Policy makers will continue monitoring the impact of repayments:

As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations are contributing to its monetary policy stance.

Additionally, as expected, The ECB is expected to stop its APP re-investments by July (but PEPP re-investments will continue until the end of 2024).

Before today’s decision, the market’s expectation was for an ECB terminal rate of around 3.62% in September (so a hike in June and then a 50% chance of another hike by September). The immediate reaction was a fall in the terminal rate expectation to around 3.55% (i.e. one more hike and a very small chance of another after that).

The EUR dipped modestly on the news…

Short-end Bund yields dropped too…

Watch ECB President Christine Lagarde’s press conference live here (due to start at 0845ET):