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[MARKET ANALYSIS] ECB Review: Statement as expected, President Lagarde laid the ground for a potential June hike

The ECB's latest statement was largely in line with expectations, maintaining the current policy rate while acknowledging growing stagflation risks.

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[MARKET ANALYSIS] ECB Review: Statement as expected, President Lagarde laid the ground for a potential June hike

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  • Broadly as expected from the ECB statement, with the policy rate maintained and the commentary acknowledging the increasingly stagflationary environment that is emerging. The ECB stuck to the script in terms of data-dependent and meeting-by-meeting guidance, points that potentially assisted in the slight dovish reaction as it unwound some outside calls for a more hawkish nod in the statement. Furthermore, the ECB said that it remains well positioned to navigate the uncertainty and that while upside inflation risks have intensified and short-horizon expectations have "significantly" increased, longer-term expectations remain anchored; again, likely driving the modest dovish reaction.
  • Thereafter, President Lagarde said that risks to growth are to the downside and inflation to the upside; note, she omitted the usual "tilted" language here. Perhaps most pertinently, Lagarde said that a hike was discussed, but a unanimous decision to hold policy was taken. In terms of the justification for the hold, primarily amid the significant uncertainty present, long-term inflation expectations being anchored and as they are not seeing any significant second round effects at this point. Ahead, Lagarde said she thinks she knows the direction of policy and believes that the six weeks to the June meeting, which will include new forecasts, will be sufficient to make an informed decision on monetary policy.
  • Lagarde stating that a hike was discussed sparked a modest hawkish reaction, weighing on Bunds and lifting the EUR somewhat.
  • Overall, Lagarde has laid the groundwork for a hike potentially at the June meeting; however, given the significant uncertainty and lack of insight on second round effects, wage implications, growth risks and many more points of uncertainty, a hike in June is far from certain at this point.
Context

President Lagarde's remarks hinted at a potential interest rate hike in June, though she emphasized significant uncertainties that remain, making such a move far from guaranteed. As a result, we may see slight upward pressure on the EUR and downward movement in Bunds as the market digests the implications of her comments for future policy decisions.

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