After a positive start to the week, global equity markets fell as the weekend approached after the ECB outlined plans for higher Eurozone interest rates and US CPI inflation data for May disappointed.
As expected, ECB policymakers yesterday (Thursday 9 June 2022) left interest rates unchanged. However, of more importance to us were the clues on what is in store in terms of size and timing of future interest rates, which came in remarks from the ECB President, Christine Lagarde at the accompany press conference and ECB statement.
The ECB explicitly stated that it would increase Eurozone interest rates by 0.25% at its next meeting on 21 July 2022, and given their new projections for 2022 inflation rose to 6.8% (and is not expected to be back near their 2% target until the 2024), policymakers indicated that they would continue to increase interest rates at a “gradual and sustained path” at subsequent meetings.
Interestingly, although the ECB statement appears on the surface to be very hawkish, July’s increase is actually less than the financial markets had pencilled in – suggesting to us that policymakers don’t share the market’s sense of urgency with significantly higher interest rates and obviously share our view that inflation will fall on its own volition.