- The European Central Bank has raised rates by 50 bps in February, as expected.
- ECB President Christine Lagarde committed to another 50 bps hike in March.
- Stating the inflation risks are more balanced is a dovish tilt.
- Lagarde’s refusal to commit to further hikes beyond the next meeting is seen as a pause.
Another one, and then done? That is the impression that European Central Bank President Christine Lagarde has given, probably not intentionally. The Frankfurt-based institution “intends” to raise rates by 50 bps in March and then evaluate. While Lagarde talked about significant hikes – in the plural – markets have their doubts.
The ECB decision has come after a Federal Reserve (Fed) decision perceived as dovish and an unequivocally downbeat message from the Bank of England (BOE). Lagarde tries to say that the ECB will do what it takes, but she is not as hawkish as in December.
Here are three dovish points:
First, the ECB describes inflation risks as more balanced – that is clearly dovish, especially as the Core Consumer Price Index (Core CPI) is off the highs.
Second, she cannot fully commit to a hike in March, only promises strong intent. That is a small factor limiting the hawkish message.
Third, as mentioned above, the ECB decision comes after the previous two, and markets are skeptical. When they hear uncertainty, they see a pause.
Will the Euro come crashing down? No. The eurozone is doing better than expected and the ECB is still more hawkish than others. However, policymakers acknowledge the reality of falling inflation – which is a good thing – and the fact that the energy crisis is unwinding.
All in all, I expect the Euro to remain one of the strongest currencies, but Lagarde lowered the level of enthusiasm. The way up for EUR/USD will be a long and winding road.