- The European Central Bank has raised rates by 25 bps, yet signaled its tightening cycle has ended.
- President Christine Lagarde has failed to convince markets that further hikes are possible.
- Subdued growth forecasts imply rate cuts could come sooner than expected.
That's all, folks – that is the message markets have understood, overshadowing the fact that interest rates have risen once again. The European Central Bank (ECB) has raised rates by 25 bps in its September decision but made two significant moves that are weighing on the Euro.
First, the Frankfrut-based institution balanced the hike with an announcement that no more increases are likely, with the usual caveats. Here is the quote, emphasis mine:
Based on its current assessment, the Governing Council considers that the 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.
Did the ECB vow to refrain from hiking rates in the next few months? No. It leaves some optionality for moving again if conditions change. Nevertheless, it looks at rate hikes in the past tense.
Secondly, the bank downgraded forecasts, focusing on what markets are already worrying about – growth. Expectations stand on a meager expansion of 0.7% in 2023 and 1% in 2024. Markets see the ECB's meager growth forecast as a graceful way to avoid admitting it fears a recession.
European Central Bank President Christine Lagarde made an effort to remain balanced toward the press and with one eye at her peers, hawkish and dovish. Nevertheless, markets received another sign to go with the trend, which is a lower Euro.
I expect further pressure on the common currency – at least until the Federal Reserve's decision. Only a similar dovish move in the US would give the Euro relative stability.
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