ECB slows rate hike, but unlikely to stop

The European Central Bank raised interest rates by a quarter of a percentage point to 3.75%, duplicating the Fed’s move the day before. This was the move that market analysts had been predicting, although some central bank officials had been talking about the need for a 50-point hike for weeks. The market may have priced in some probability of such a move, which put pressure on the Euro following the rate announcement.

In a published commentary, the ECB reiterated that inflation has been “too high for too long”. The bank continues to focus on solid underline price pressures despite the decline in the headline annual rate.

Like the FOMC, the ECB today reminded us of the time lag between interest rate changes and their economic impact. The market took this as a willingness to pause on further hikes. However, we must be cautious with this interpretation, as this comment could also justify a smaller hike rather than signalling a pause.

The ECB has started to raise rates later than the Fed, with higher peak inflation. From this point of view, it is logical to expect that rate hikes will also end later. In 2007-2008, the ECB had a rate of 4% before raising it to 4.25% for six months in response to a surge in energy prices. This time, the ECB will likely continue raising rates sooner than in 2008.

The potential for further hikes in Europe and a pause in America could drive a gradual rise in European currencies against the dollar in the near future.

The FxPro Analyst Team