Has the ECB changed its policy stance?Euro rises for the fifth straight day as Lagarde shows signs of turning eagle

2022-05-18 0 By

While the Bank of England came close to raising interest rates by an unconventional 50 basis points grabbed the monetary headlines on Thursday, the European Central Bank, which updated its monetary policy decision on the same day, also quietly changed its tune: a rate hike this year is unlikely.In Thursday’s announcement, ECB’s decision to keep key interest rate unchanged and stop PEPP (Epidemic Emergency Purchase Program) in March was fully in line with market expectations. What really triggered market volatility was president Lagarde’s press conference afterwards.Lagarde told a news conference that inflation in the euro zone was likely to stay higher for longer than previously thought, but would still fall this year.Risks to the inflation outlook are focused on moving higher relative to December’s policy outlook, particularly in the near term, as conditions have indeed changed.The ECB president confirmed that while governing council members were “unanimous in their concern” about inflation, they had decided not to rush into a decision until more information was available.Earlier this week, Eurostat released inflation data for January 2022, with euro zone CPI rising 5.1% yoy to a record high, well above analysts’ median forecast of 4.4%.Ms Lagarde said on Thursday that inflation in January was higher than expected mainly because of the direct and indirect effects of soaring energy prices, while higher logistics and fertiliser costs added to food inflation pressures.Interestingly enough, Lagarde said on Thursday that she would carefully assess the situation and rely on data to make her judgment, rather than saying that the conditions for a rate hike were unlikely to be met in 2022.Stefano Pesole, currency strategist at ING, said the ECB had today opened the door to speculation about tightening, and markets are now free to speculate that the ECB will change guidance at its March policy meeting.After Lagarde’s comments, the euro rose more than 1 percent against the dollar on the day to above 1.14 amid a sell-off in U.S. stocks that sparked risk aversion.European money markets are also betting that the ECB will raise interest rates by 40 basis points this year, up from 25 basis points before the policy decision.In contrast, European sovereign bonds sold off, with Italian 10-year yields jumping 19 basis points at one point and spreads over European benchmark Bunds hitting their highest level since 2020.Germany’s two-year bond yield, the most policy-rate-sensitive, also jumped 13 basis points to -0.32 per cent, its highest since 2015, while the five-year yield was also close to 0 per cent.The ECB is scheduled to hold its next monetary-policy meeting on March 10.(Credit: Financial Union)