ECB approaches end of hiking cycle with 25bps rise
Markets were split over whether the ECB would hike rates due to a lack of forward guidance.
The ECB's Governing Council said today (14 September) that the central bank now forecasts average inflation will reach 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025, with the upward revisions being credited largely to a higher path for energy prices.
However, ECB projections for core inflation were revised slightly downwards to an average of 5.1% in 2023, 2.9% in 2024 and 2.2% in 2025.
The central bank said that previous hikes continued to be «transmitted forcefully» into the economy, as financing conditions tighten and demand increasingly dampens.
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«With the increasing impact of this tightening on domestic demand and the weakening international trade environment, ECB staff have lowered their economic growth projections significantly,» it said.
It is now expected that the euro area economy will expand by 0.7% in 2023, 1% in 2024 and 1.5% in 2025.
Based on this, the council indicated this was likely to be the final hike of the cycle, stating it believed rates had «reached levels that, when maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target».
Mike Bell, global liquidity market strategist at JP Morgan Asset Management, agreed with the assessment, noting the ECB was «probably done hiking» due to indications from business surveys that growth was facing an imminent slowdown.
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