Policy mistakes could well be the unintended results.
No surprise in the rate decision from the European Central Bank (ECB) today, which saw the committee raise rates by 25 bps to 3.5%. The surprise, much like the Federal Reserve’s view yesterday was that inflation forecasts have been increased through to 2025. Central banks collectively now seem to think that higher rates are still warranted even if their economies are softening or in recession already. Policy mistakes could well be the unintended results. Using the ECB’s argument of rate hikes being “transmitted forcefully” but whose passthrough effects into the real economy are “gradual” highlights the difficult task before them. Using a large hammer to swat an inflation bug has the obvious risk of doing more collateral damage. Irrespective of the bluntness of its tool, continued hikes from here is the ECB’s messaging and the markets are now pricing in a terminal rate of 4%.
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