The European Central Bank is likely done hiking interest rates, analysts said following today’s decision in Frankfurt to raise its three benchmark eurozone interest rates by 25 basis points. Euro bond markets rallied while the euro fell against the dollar amid expectations that eurozone rates now have peaked and that any subsequent move in market interest rates will be a cut, although that may take some time.
Inflation in the eurozone is still expected to remain too high for too long, said the ECB when explaining its decision to boost its main deposit rate to 4%, the highest level since 2002. Looking ahead, the ECB said that rates now are at a level where they can make a significant contribution to bringing down inflation towards the medium-term target of 2 percent.
Key ECB interest rates “have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” the central bank said. “The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.”
‘Dovish hike’
Frederick Ducrozet, head of macroeconomic research at Pictet Wealth Management, said he believes that the eurozone now has achieved its peak in interest rates for the current cycle. “A dovish hike insofar as guidance suggests this will be the final one,” he tweeted. “At peak rates the focus will be on policy transmission, and how long rates need to stay at this level.”
Eurozone bond markets rallied amid expectations that peak eurozone rates will open the door for higher bond prices and lower market interest rates. The yield on the ten-year German government bond, the eurozone benchmark, was 6 basis points lower at 2.59 percent.
Expectations of analysts and market strategists had been mixed ahead of the ECB meeting as the central bank had not given clear guidance on what to expect from its September decision.
‘Heavy words’
Lagarde referred to the specific text in the ECB statement on maintaining interest rates at the current level as “a key paragraph” with "heavy words". She said the Governing Council, which includes central bank chiefs from all the eurozone countries, did not have an “adversarial discussion”, although some members didn't draw the same conclusions with some governors flagging their preference to halt interest rates.
“With today's decision, we have made sufficient contributions under current assessment, to returning inflation to target in a timely manner,” said Lagarde. “And as I said, both elements matter, the level, sufficiently restrictive, and the duration, but it's obvious that the focus is probably going to move a bit more to the duration. But it is not to say, because we can't say that we are at peak.”
