Euro area: Unprecedented rate hike by the ECB – UOB

Economist at UOB Group Lee Sue Ann reviews the latest ECB interest rate decision.

Key Takeaways

“The European Central Bank (ECB) decided to raise its three key interest rates by 75bps, and ECB President Christine Lagarde hinted it could do the same again as part of ‘several’ future moves to fight against rampant inflation. The ECB significantly revised higher their inflation projections, now expecting inflation to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024. It also revised down markedly GDP growth to 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024, thus avoiding an economic recession.”

“The Eurozone economy is, however, expected to stagnate later in the year and in the first quarter of 2023. Russia’s war on Ukraine, an uneven recovery from the COVID-19 pandemic and a drought across much of the continent have combined to create a significant amount of uncertainty and downside risks. We are in the midst of revising our growth and inflation forecasts for the region and will be publishing them at the upcoming 4Q22 Quarterly Outlook.”

“Meanwhile, the implied hawkish tone by the ECB, despite the absence of a formal forward guidance, has led us to pencil in further rate hikes ahead. There are two more meetings left for the year. For now, we see the ECB hiking by another cumulative 50bps for this year to bring the refinancing rate to 1.75% and the deposit rate to 1.25% by year-end. Although we believe the ECB wants to play catch up, it needs to exercise a lot more caution as we see the Eurozone economy inevitably falling into a recession during winter, even without additional rate hikes. For this reason, we acknowledge the high uncertainty surrounding our ECB call, and the “terminal rate” of this current hiking cycle.”