ECB could slow policy tightening in coming months

The European Central Bank raised interest rates by 75 basis points on Thursday as expected. According to analysts, the ECB is to hike 50bps in October, and 25bps at each of the three meetings from December to March, reaching a terminal of 2.00% at that meeting.

Today’s decision suggests that the ECB will slow the pace of tightening from here as it heads toward the neutral rate, which by most accounts lies somewhere in the 1-2% range. Analysts expect the Governing Council to hike rates by 50bps in October, and 25bps at each of the December, February, and March meetings.

This anticipation leaves the Depo Rate at 1.50% by year-end, in line with prior forecast, and 2.00% by March 2023. From there, the ECB is expected to leave policy on hold until 2024, when it likely cuts rates back toward the mid-point of the neutral range.

One more hike than ECB’s President Lagarde suggested at the press conference could be on the cards, but given the meeting-by-meeting nature of the ECB’s decision-making framework, and the ease with which they have eschewed guidance in the past, markets would put little weight on her specific timeline of hikes at this stage.