Europe | The ECB is on a journey

At last week's ECB meeting Christine Lagarde announced that the central bank has started out on a "journey" toward the normalization of monetary policy through a series of measures that it will take gradually over the next few months.

Key points

• Key points:
• The ECB's first decision—to end net asset purchases under the Asset Purchase Program (APP), as of July 1, 2022—was already largely priced in.
• As a result of this, together with the end of net purchases of the pandemic emergency purchase program (PEPP) back in March, the ECB's balance sheet will stop growing. This could create fragmentation risks in Europe, and with the ECB not having set out any specific measures to deal with them, this led to a rise in peripheral risk premiums after the meeting.
• The second important measure arising from the latest meeting, was the early announcement of the next round of planned rate rises — something the ECB had never done so explicitly before. This was perhaps so as to anchor the decision reached by its Governing Council on Thursday: an initial rise of 25bp in July and another in September of 25bp, or more likely 50bp, if the inflationary outlook does not improve).
• The third notable element of Thursday's meeting, and the one on which the ECB's hawkish tone appears to be based, is the significant upward revision in its inflation forecasts. The ECB predicts average inflation of 3.5% in 2023, compared to a projected 2.1% just three months ago.
• Once the ECB exits from negative territory, the key will be the speed at which interest rates reach their target level, and whether or not this will be above the neutral rate, which could be below 2% - however, this debate is still a long way off.

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