Highlights:

• At today’s meeting the ECB’s Governing Council (GC) agreed to raise rates by a further 25 bps. But unlike last time it was backed by a “solid majority” and not unanimity.
• This was not trivial given weak activity data and the downward revision of the ECB’s growth and underlying inflation projections. The key rationale was that especially headline inflation is still seen as “too high for too long” and that some indicators of inflation expectations “increased and need to be monitored closely”.
• The GC implied that at current levels rates are sufficient to bring inflation back to target but that this needs “a sufficiently long duration”. In the Q&A President Lagarde gave the impression that it would need much to trigger another hike and that the focus now shifts towards the duration of the present rate level. She dented speculations about outright bond selling.
• All in all, we think that the peak of the hiking cycle is now reached given the still too optimistic growth out-look of the ECB. We see the risk of a policy mistake rising but expect the easing cycle not to start before Q3 2024.
• Markets celebrated the dovish hike in a knee-jerk reaction. 
   

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