ECB Signals Two Additional Rate Hikes Amid Inflation Concerns

Two additional rate hikes

As the ECB has seemingly lost faith in its forecasting models (the staff is expecting 2.2% in 2025), it has been basing monetary policy increasingly on current inflation figures. No wonder that it still believes there is a need to tighten further.

In a rather hawkish speech in Sintra last month, ECB President Christine Lagarde reiterated that a rate hike in July looks like a done deal and at the same time she said that “under these conditions, it is unlikely that in the near future the central bank will be able to state with full confidence that peak rates have been reached”.

Board member Isabel Schnabel added in a recent interview that “given high uncertainty about the persistence of inflation, the costs of doing too little continue to be greater than the costs of doing too much”. That all points to (at least) two additional 25 basis point rate hikes. That would bring the deposit rate to 4% in September. Rates will probably remain at that level until the summer of 2024 when lower inflation is likely to open the door for some cautious easing.