Exclusive: ECB Very Likely to Hike by 25bp in July, But More Not Absolutely Impossible

10 June 2022

- ECB insider: ‘Very high probability it’s going to be 25 basis points’ in July
- ECB insider: If inflation expectations de-anchored, ‘would we stick to 25? I don’t think so’

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde left little doubt on Thursday that the ECB would hike interest rates by 25 basis points next month, but markets should not assume that the ECB’s hands would be restrained from doing more, if for example inflation expectations were seen clearly de-anchoring between now and then, Econostream understands.

‘Accordingly, and in line with our policy sequencing, we intend to raise the key ECB interest rates by 25 basis points at our July monetary policy meeting’, Lagarde said in her monetary policy statement and subsequently reiterated.

What ‘intend’ means and whether a change of intention is admissible are questions that were raised at the Governing Council meeting, but not fully answered, according to an ECB insider who found this problematic.

‘If you don’t define certain words, then you are left with different understandings of terms’, he said. ‘There’s a very high probability it’s going to be 25 basis points. So, do we have optionality when we say “intend”? What are those things that might change our intention? There is no answer. We didn’t have time to dive into this.’

Queried at the press conference as to whether a larger July hike was excluded, Lagarde instead presented arguments - including the potential financial market reaction - in support of limiting the July hike to 25 basis points, without clearly declaring that the Council could not opt for a larger increase in six weeks.

The insider Econostream spoke to assessed that the chances of more than 25 basis points in July were quite limited, informally putting these at 3% by way of illustration, but then added an important caveat.

‘If we see signs of de-anchoring inflation expectations, would we stick to 25? I don’t think so’, he said.

With respect to September’s hike, Lagarde said that ‘[t]he calibration of this rate increase will depend on the updated medium-term inflation outlook. If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate...’

However, whilst repeatedly referring explicitly to 25 basis points in July, she never specified that the possibly ‘larger increment’ in September would be precisely 50.

The insider Econostream spoke to agreed that technically, ‘depending on the situation, it might be 26 [for example]. I mean, you can’t exclude that possibility.’ At the same time, he made clear, the dominant current interpretation of ‘larger increment’ among policymakers was 50 basis points.

‘I would put it like this: If I needed to bet now, I would bet on 50’, he said. ‘It means 50 as of this moment. In today’s world, it’s 50. On September 8, it might become another number.’