Today’s hawkish guidance is the result of inflation remaining far too high, and from projections indicating inflation will stay above target for too long. The statement said the ECB Council “judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive.” The term “steady pace” here does not rule-out a further step down to 25 bps, but also allows a possibility of more 50 bps hikes. While the market is currently pricing in a peak terminal rate of just over 3%, the message was clear: Slower (hikes) does not necessarily imply lower (endpoint).
The United States Federal Reserve has also recently slowed the pace of its rate hikes, which has been a short-term buffer to the euro (up 12% since a late September low). This is contributing to tightening financial conditions in Europe, as well as dampening import inflation effects—both welcome developments for the ECB to achieve its goals.
With both annual headline and core inflation remaining near record highs (10.0% and 5.0% respectively), the euro area still needs additional tightening to bring inflation back towards the 2% target. Nonetheless, after a couple more rate hikes, if the economic slowdown persists for longer, or presents a deeper contraction than currently forecast, this may impede the ECB from further hikes, arresting its hiking cycle to a premature end before it has effectively seen inflation return to target.