ECB leaves door open to further tightening – UOB

Economist at UOB Group Lee Sue Ann assesses the last ECB event on May 4.

Key Takeaways

“The European Central Bank (ECB) decided to raise its three key interest rates by 25bps. This is the smallest rate increase since the ECB started its current tightening cycle in Jul 2022. It also expects to discontinue the reinvestments under the Asset Purchase Programme (APP) as of Jul 2023. As for the Pandemic Emergency Purchase Programme (PEPP), guidance was left unchanged (reinvestments intended until at least end-2024).”

“The justification for hiking was clear, with the ECB stating that ‘the inflation outlook continues to be too high for too long’, and adding that while ‘headline inflation has declined over recent months, underlying price pressures remain strong’. The downshift from 50bps to 25bps was also justified by the ECB acknowledging that “past rate increases are being transmitted forcefully to euro area financing and monetary conditions”.

“In all, the ECB did not provide further guidance about upcoming rate decisions. At this juncture, we are penciling in one more 25bps hike at the next meeting on 15 Jun, since Lagarde highlighted that there is still ‘more ground to cover’.  But the ECB clearly has every reason to stick to a data dependent approach. Whether Jun or Jul will be the last will depend crucially on inflation data scheduled for late-May.”