ECB plans next big rate hike, making Lagarde the last hawk standing

LATE to the global interest-rate hiking party, the European Central Bank (ECB) is trying to convince everyone that it will also be one of the last to leave. 

As their counterparts from the US to the UK send out signals of waning aggression after drastic monetary tightening, eurozone officials insist that their own onslaught against inflation is not about to let up.

ECB president Christine Lagarde on Thursday (Feb 2) all but promised to repeat a hefty half-point rate hike in March, with the prospect of more action thereafter.

Officials insist that underlying price pressures are no less concerning, and the eurozone’s tightening is less advanced than that of their peers. But they risk looking increasingly isolated as investors show growing confidence that the global inflation shock is fading.

That showdown may come to a head in six weeks, when the ECB holds its next monetary policy meeting. 

Policymakers have pledged to remain hawkish, despite also vowing to be “data dependent” and to take decisions “meeting by meeting”. Their stance may start looking like a statement of faith, if statistical releases and new quarterly forecasts – due to be released then – do not clearly justify such firm action.

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“A lot of news can come between now and March,” said Peter Praet, a former ECB chief economist. “I was surprised by the intention to increase by 50 basis points because… who knows what’s going to happen?”

In contrast to the ECB doubling down on half-point hikes, the US Federal Reserve (Fed) lifted rates by only a quarter-point on Wednesday. Chair Jerome Powell did say that the Fed would keep raising rates, but his rhetoric and a more upbeat inflation outlook opened the door for a rally in stocks and Treasuries.

Similarly, the Bank of England on Thursday signalled that its own hiking cycle may be drawing to a close. The Bank of Canada now expects to hold its rates, after raising them last week.

All of these central banks began lifting rates earlier than the ECB did, and have raised them by considerably more than the eurozone’s 300 basis points to date. Even so, a relatively synchronised turn in their cycles has not escaped the bloc – its inflation slowed more than expected in January, to 8.5 per cent.

The ECB’s survey of professional forecasters, published on Friday, showed that expectations for both headline and core inflation in 2025 were above the 2 per cent target.

Lagarde cited underlying consumer-price gains, which are at a record level, and wage-pressure risks as reasons to stay alert. But the market reaction, including what may turn out to be the largest drop in Italian 10-year yields in three years, suggests that such hawkish rhetoric is falling on deaf ears.

Pietro Reichlin, a professor of economics at Luiss University in Rome, reckoned that the ECB was right in its determination to defy the markets and “stay the course”, in Lagarde’s words.

He said: “Inflation remains high in Europe and the economy is doing slightly better than expected, so the decision to keep raising rates and to pre-commit makes sense. There’s a good argument for staying the course on further hikes.”

The ECB also acknowledges that the price threat is starting to moderate. Lagarde said that risks to the inflation outlook were “more balanced” than before.

Nonetheless, she was adamant that investors should consider a half-point increase in March as more or less confirmed. While not “irrevocable”, only “quite extreme” scenarios would divert the ECB from that course, she said.

On Friday, Lithuanian central bank chief Gediminas Simku said that there may be even more rate hikes after next month. Peter Kazimir, governor of Slovakia’s national bank, said the fight against inflation was “far from won”.

New forecasts due in March, which will take account of lower energy prices and another monthly inflation reading, are among the data ECB policymakers will have by then – even if they say now that the information will not change their decision.

However, the risk in the central bank’s locked-in approach ties officials too long – as seen last July, when it finally ended its ultra-low rate stance with its first hike after much persuasion. The ECB’s prior instances of aborted tightening, in 2008 and 2011, also point to its mistakes.

“The ECB should not be the last hawk standing,” said Holger Schmieding, chief economist at Berenberg, an investment bank. “It should stop soon. However, the statement suggests they will most likely raise rates further in May.” BLOOMBERG