ECB Outlook

ECB Battles Lingering Inflation with Hold or Hike says Lagarde

ECB President Lagarde states that rates will not decrease but with either hold or hike to battle stubborn inflation.  The mandate of the ECB is price stability.  Facing tight job markets that could increase pressure on inflation plus feeling the aftereffects of the Ukrainian-Russian War more mean a more difficult environment for ECB compared to the FED.  In fact, the ECB is behind the FED and has a more difficult job due to different conditions in EU countries.

European Central Bank Governing Council is Divided between Hawks and Doves

This has led to different views which can be seen with 9 members as doves, 5 as neutral including Lagarde, and 12 as hawks.  In short, there is both more uncertainty and risk in the EU.  The deposit rate with the 0.25% rate hike now stands at 3.75% with the main refinancing rate at 4.25%.  With inflation being more stubborn, it is not surprising that Lagarde ruled out rate cuts.  The ECB faces a more difficult path to a soft landing thus higher uncertainty versus the FED.

In the dove camp, Yiannis Stournaras the Central Bank Governor of Greece stated that a further interest rate hike in September looks difficult for the ECB (see Reuters article on Stournaras Comments).   This showcases how difficult policy is for the ECB.  Already the EU’s largest economy, Germany, is feeling the effects and performing poorly.  If you add domestic political trumoil in France, the situation in the EU is in flux.

Eurozone Economic Outlook Deterioration and Risks

Expectations are for inflation to possibly stick around till 2025 meaning it will take longer to bring it back to the 2% inflation target.  This has obviously caused concern from some of the more dovish members of the ECB Governing Council.  Facing persistent inflation with deteriorating business conditions risks a harder landing for the EU economies.  Complicating the outlook is recent softening of some inflation data but we need to keep in mind that core inflation is still high.

Market Impact 

The EU will face a more difficult economic environment combined with lower expectations of a China rebound.  Expect underperformance of the stock market which means some buying opportunities in the medium term.