Europe | ECB mirroring the Fed

There was some suspense ahead of last Thursday’s meeting of the European Central Bank (ECB) as to the size of the rate hike (between 25 and 50 basis points), with the ECB ultimately choosing the lesser of two evils.

Key points

• Key points:
• This mirrored the consensus view and seemed to confirm the notion that we are nearing the end of the rate hikes, that inflation is beginning to relent despite still being high, and that uncertainty regarding the state of the U.S. banking system merits caution.
• Many of us were on the look-out for any signals or hints that the ECB could give as to the likely course it will follow over the coming months and to what extent it might be influenced by the dovish tone taken by the Federal Reserve (Fed) on Wednesday.
• Both President Christine Lagarde and the ECB itself, in their communiqué, sought to make it abundantly clear that they were taking a hawkish stance —notably, the ECB began proceedings with an emphatic statement on the problem of inflation (“the inflation outlook continues to be too high for too long”) and a reminder that inflationary risks are likely to increase moving forwards.
• The ECB went one step further by announcing, earlier than many were expecting, that it would stop reinvesting the principal payments from maturing bonds on its balance sheet under the APP programme, thus slightly bringing forward the Quantitative Tightening (QT) process.
• For now, the ECB has eased the pressure following the Fed's previous meeting and has made it clear that it is not attempting to emulate the Fed and its rather dovish tone (with an end-of-cycle feel). A further hike in June is all but guaranteed, and another in July is a distinct possibility.

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