Europe | ECB swimming in troubled waters

The European Central Bank’s first meeting of the year was expected to be quiet and ‘business as usual’ despite the widely expected 50 basis point hikes in the benchmark interest rate. There were no surprises, but it is difficult for the central bank to decide on and clearly communicate the future path of rates.

Key points

• Key points:
• Lagarde acknowledged last Thursday that inflation is behaving better than anticipated in December (when the bank announced a forecast that was too high), and noted that the risks to inflation are more balanced, although many unknowns remain.
• The complexity of the global economic environment makes it hard for the ECB, and central banks in general, to explain what they are doing. Proof of this is the reaction of the markets, which, with long-term rates falling, are not going exactly where the central bankers want them to go.
• Starting with the uncertainties surrounding growth, the European economy avoided recession in the fourth quarter (which many of us expected): instead, it grew by one tenth of a point and may start to recover in the first half of 2023.
• But unfolding events in the war in Ukraine remain a huge source of uncertainty, rate hikes are now starting to take their toll on activity, and the potential recession in the United States (again, things are not clear there, as employment remains strong despite the impact of rate hikes in some sectors) may drag Europe down again.
• The ECB is sticking to its story: it "intends" to raise another 50 basis points at the March meeting, as Lagarde already telegraphed in December. After that, the bank will decide on a meeting-by-meeting basis according to the emerging data. The stated goal is to leave rates in hawkish territory and to keep them there for a long time.

Authors

Geographies

Topics

Tags