- ECB raises key policy rates by 25 basis points to 1.25%.
- Mr Trichet gives little away about future intentions.
- (2052 GBp, -2,10%) hike likely to be in June or July.
- No precommitted path for rates but we see 2% refinancing rate by end year.
- ECB concerned that ‘real’ rates are still extremely low.
- Burden of higher rates won’t fall evenly across countries
- We think rate hikes will shave around 0.5% off Irish economic growth
As expected, the European Central Bank increased its key policy rates by 25 basis points today to bring its refinancing rate to 1.25%. This was the first interest rate increase since July 2008 and while Mr Trichet indicated that the ECB “did not decide that this was the first in a series”, his qualification that “we always do what we judge necessary” means markets remain of the view that interest rates are set to rise at two or three month intervals through 2011 and into 2012. We
think rates might rise slightly faster than is generally expected.
Even after yesterday’s rate hike, the ECB judges that the stance of monetary policy remains “very accommodative”. Missing yesterday, as it was last month, is any indication that at current levels rates are “appropriate”. Instead, the ECB sees “risks to inflation remain on the upside” and the risks to activity “remain broadly balanced”, the case for further rate increases remains in place. Yesterday’s assertion that “it is essential that the recent price developments do not give rise to broad-based inflationary pressures” also argues that the ECB will continue to act against the threat of second round effects. With the ECB again downplaying subdued lending growth and emphasising instead that “monetary liquidity remains ample and may facilitate the accommodation of price pressures,” yesterday’s message confirms the view that a hiking cycle has begun.
Mr Trichet put in an accomplished performance yesterday in that there were no surprises in the text of his statement or the tone of his delivery. In the past month or so markets had prepared for an orderly and gradual increase in ECB rates and yesterday’s press conference did nothing to alter that view. While the comments outlined abovesustained expectations of higher rates through the remainder of the year, there was nothing in yesterday’s ECB message to alter analysts views as to how far or how fast rates might rise. So, market reaction was muted. In the current environment the ECB would be keen not to shock markets too often.
Significantly, there was no indication yesterday of any looming change in the ECB’s liquidity support mechanisms. Although the opening press statement continues to flag that these measures “are temporary in nature”, there was little indication from Mr Trichet that any dramatic innovation was close at hand. This might seem to rule out early action to introduce radical new support mechanisms for peripheral economies but for the Eurozone money market as a whole it means comfortable liquidity conditions are set to persist. As a result, there is little expectation that market rates will run ahead of ECB rate changes as often happens in tightening cycles.
Could rate hikes come more quickly? Please dovnload full report form Analyses section.