On Thursday, the European Central Bank (ECB) delivered an interest rate hike of 0.5% and also explicitly signaled that markets could expect another rate hike in the next month of the same magnitude.
The ECB reaffirmed that it intended to stay focused on its fight against inflation which has proven to be quite persistent.
Market reaction
However, the financial markets interpreted the signaling as a hint that the central bank might end the tightening cycle soon.
They had done the same thing a day earlier after Jerome Powell, the chief of the US Federal Reserve, had stated that there were signs of inflation cooling down.
Three policymakers of the ECB spoke on the condition of anonymity and pushed back on the reaction of the market.
They disclosed that they fully expected the central bank to deliver another rate hike in the month of May as well.
Christine Lagarde, the President of the ECB, also disputed the market’s interpretation that the move on Thursday indicated the end of the hiking cycle.
She spoke at a news conference and said that they were aware that they had a lot of ground to cover and were not done, thereby reiterating the mantra of the central bank to bring inflation down to their 2% target.
Rate hikes
The ECB has maintained a record pace when it comes to hiking the interest rates for combating the rising prices that are a byproduct of numerous factors.
These include the energy crisis that occurred due to the invasion of Ukraine by Russia almost a year ago and also the aftermath of the global COVID-19 pandemic.
Functioning as the central bank of the 20 nations that use the euro, the ECB hiked the interest rate by another 50 basis points to take it to 2.5%.
This was in accordance with market expectations and with what it had said back in December in its last meeting.
The future
The central bank stated that its next interest rate hike would be of the same magnitude, but did not say much about the future ahead.
According to the ECB, after delivering an interest rate hike of 50 basis points in March, the Governing Council would evaluate the future course of its monetary policy.
Market analysts said that ECB had opened the door to a slower pace of rate hike after March, or a pause, which was also reflected in the markets as there was a decline in German bond yields by 15 bps.
The disconnect between the market interpretation and the message of the ECB was similar to what had been seen on Wednesday after the meeting of the US Federal Reserve.
The US central bank slowed down its pace of interest rate hikes and the chairman admitted that disinflation had begun, but also reaffirmed that further increases in borrowing costs were needed.
Meanwhile, the IMF urged central banks via a blog to communicate the message of keeping interest rates higher for longer for bringing inflation down to their target.
