Hawkish ECB not pivoting but in for a long game – further 50 bps hikes ahead

Highlights:

• At today’s meeting the ECB’s Governing Council (GC) lifted its key rates by another 50 bps, in line with expectations.Yet the more measured pace was accompanied by a hawkish statement and press conference.
• The ECB also pledged to start reducing its asset purchase programme (APP) portfolio in March, starting with € 15 bn per month on average until the end June. Then the pace will be recalibrated. Details about the parameters for reducing APP holdings will be provided at the February meeting.
• The key rationale is a “substantial upward revision to the inflation outlook” with neither headline nor core inflation foreseen to converge to the 2% threshold by 2025.
• The GC dashed any hopes of a policy pivot, stating that “interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive“ and that it would keep them at such levels to bring inflation down. The GC stated that key rates are the “primary tool for setting the monetary policy stance” and President Lagarde suggested that further 50 bps rate hikes are ahead.
• In a knee-jerk reaction equity markets suffered and government bond yields rose.
• We now expect another 50 bps hike in February, followed by further increase by 50 bps thereafter, leading to a 3.0% terminal rate.
   

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