ECB pondering slower hikes after half point in February

EUROPEAN Central Bank policymakers are starting to consider a slower pace of interest-rate hikes than President Christine Lagarde indicated in December, according to officials with knowledge of their discussions.

While the 50 basis-point step in February she signalled remains likely, the prospect of a smaller 25-point increase at the following meeting in March is gaining support, the officials said, asking not to be identified because talks on the matter are confidential. 

Any slowdown in monetary tightening shouldn’t be viewed as the ECB going soft on its mandate, the officials said. They stressed that no decisions have been taken, and that policymakers may still deliver the half-point move for the March meeting that Lagarde pencilled in on Dec 15.

An ECB spokesperson declined to comment on future action by the Governing Council.

The euro trimmed its advance after the report, trading around US$1.0835 versus as high as US$1.0869 earlier. While a half-point hike remains priced for February, money markets eased tightening wagers further out, putting odds on a similarly sized increase in March at around 60 per cent compared with 80 per cent earlier.

Weaker-than-expected inflation in the euro area, a drop in natural gas prices and the prospect of gentler tightening by the US Federal Reserve have brought some comfort to policymakers as they ponder how to continue the most aggressive rate hikes in ECB history. 

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While officials opted to slow the pace of increases in December with a 50-basis-point move, they coupled that decision with a sense of heightened vigilance on price stability. 

Lagarde said then that available data “predicate” a 50-basis-point hike at the Feb 2 meeting “and possibly at the one after that” – cautioning that decisions will continue to be data-dependent. 

Whether and how inflation prospects have shifted will only become apparent with the new forecasts in March, which might help justify a less aggressive pace. That may be one reason for policymakers to be cautious about departing from their outlined hike in February.

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ECB interest rates seen hitting peak of 3.25% before cut in July

Since the start of 2023, officials from all camps – from doves to hawks – have indicated some openness to discussing a slowdown in the pace of tightening after raising the deposit rate by 250 basis points in just six months.

Latvia’s Martins Kazaks, among the Governing Council’s most conservative members, said in an interview that while he expects “quite large steps” at both of the next two meetings, “of course the steps may become smaller as necessary as we find the level appropriate to bring the inflation down to 2 per cent.”

Finland’s Olli Rehn urged his colleagues to “keep an open mind to adjust our policies if needed,” while his French colleague Francois Villeroy de Galhau called for pragmatism and argued “we need to look at where inflation is and the outlook for inflation.”

The ECB’s Chief Economist Philip Lane was the latest to chime in, highlighting still “very high uncertainty.” In an interview with the Financial Times, he cited big declines in energy since mid-December due in part to mild weather, and said “this is a simple example of why we must not be so confident about where interest rates need to go.” BLOOMBERG