Published on Monday, July 31, 2023

Europe | ECB raises rates but changes phase

There were no surprises at Thursday's European Central Bank (ECB) meeting, nor at Wednesday's US Federal Reserve (Fed) meeting. In both cases, it was decided to raise reference interest rates, the ECB to 4.25% (the refi rate) and the Fed to 5.50%.

Key points

  • Key points:
  • Both central banks leave the door open for further hikes, maintaining an upward bias on interest rates as inflationary pressures, although moderating, are still elevated and core inflation is not yet on a clearly downward trend.
  • This time the ECB has moved to another phase in which decisions will be taken at each meeting and will depend exclusively on the data coming out and how it affects its inflation outlook.
  • This phase change does not necessarily indicate that there will be no more rate hikes, but it is a natural step, as we are closer to the finish line. Much of the work is done.
  • What is relevant now is how long interest rates will remain at this level. It seems certain that for quite some time (we estimate until the end of 2024), as the reduction in core inflation will be very gradual.
  • Ultimately, in September both the Fed and the ECB will have more data (in particular, two more months of inflation data) to decide whether or not to call a pause, with nothing decided yet. Even if they do so, it cannot be ruled out that they will maintain an upward bias and a couple of additional hikes will be left in the pipeline.

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