As expected, the ECB held rates unchanged at its February policy meeting. The three headline rates maintained by the European Central Bank were unchanged at their release at 12:45 GMT on Thursday. As this was widely priced in, there was little-to-no market reaction around the time of the release with the only adjustment in the market really being the residual effects of the BoE announcement and expectations surrounding energy price inflation following the publication of UK energy caps.
The statement that accompanied the release was an exhibition in the art of copy and paste with the instruments and language unchanged from the December meeting. The only changes were the most marginal possible with the wording dropping reference to the Bank being willing to change policy in either direction with a long overdue adjustment to the propensity for tighter policy. However, the same cannot be said of the press conference that followed 45 minutes later.
The real key that the market knew to look out for was whether the President would maintain previous language ruling out a change in interest rates before the end of the year. President Lagarde has said this numerous times and despite adhering to the principle of sequencing (dropped at the BoE and Fed), the ECB chief did not rule out 2022 hikes.
Accordingly, several banks are now for the first time calling for rate hikes towards the end of the year. The President did put a lot of importance on the March meeting seeking to kick the can down the road to allow more time to understand the state of the Eurozone economy via data. The ECB was not under pressure to defy market expectations given that there were virtually none. From that perspective, if inflation is not suddenly going to rear its head in the Euro area, the February decision could be read as a mistake. For now, the Euro has been able to break through its 50- and 100-day moving averages against the Dollar and seemingly enter a new range with January’s EURUSD lows marking a near-term price floor.
Discussion and Analysis by Charles Porter