The ECB raised rates for potentially the final time in the tightening cycle on Thursday, although it refused to give any indication of what will happen going forward.
Instead, the central bank is insisting that decisions will be guided by the economic data and that interest rates will need to remain sufficiently restrictive for some time. This is consistent with what we heard from the Fed a day earlier and what most major central banks will be communicating soon enough if they aren’t already.
We remain in a period of uncertainty on the economic data, despite the progress that has already been achieved and the further moves that are expected over the rest of the year. If the inflation data continues to improve as many expect, there’s every chance the ECB pauses in September and doesn’t then feel it necessary to hike further by October.
There are, of course, an abundance of upside risks to the inflation data from the economy continuing to display significant resilience, as we’ve already seen this year, or fresh energy or food price shocks. These things and more could tempt the ECB to hike further later in the year.
The lack of commitment to further rate hikes from the ECB today weighed on the euro and saw eurozone yields decline. The single currency plunged against the dollar, slipping back below 1.10 after coming close to 1.1150 earlier in the day.
It would appear the ECB has failed to open the door to a pause without triggering too much excitement, as it would have preferred. President Lagarde was desperately trying to avoid doing so in the press conference, repeatedly referring back to previous comments rather than directly answering questions, and it seems in doing so, traders have instead opted to read between the lines. We may see efforts to correct this in the weeks ahead.
