Has the ECB finally caught the central bank policy normalisation bug? It would appear so after President Christine Lagarde wrote a blog post yesterday that backed up some of the recent hawkish rhetoric by several ECB officials. For Lagarde to pen an intra-meeting rationale for the central bank to turn away from a decade of aggressively dovish monetary policy is quite something.
In summary, the ECB chief concluded that the era of inflation structurally undershooting their target has probably now ended, allowing the bank to start normalising policy. She rubberstamped the scenario of ending the QE bond-buying programme early in the third quarter. Rate lift-off would then take place in July and the ECB would exit negative rates some time around September. For markets, this certainly brings clarity to the process of sequencing and the path towards tightening.
Some economists are questioning why the ECB president would announce this guidance a week before the publication of the eurozone inflation data. It is also effectively front running the new ECB staff projections due to be released at its June meeting. Whatever Lagarde’s intentions, it goes against her well-known phrase used quite often, that the bank “never pre-commits” its policy intentions. Of course, that was in contrast to one of her predecessors, President Trichet, who developed an infamous code of “vigilance”.
Crucially, the policy tightening rhetoric all but confirms 25bp hikes in July and September from the ECB. It seems the hawks on the governing council have finally succeeded, though the chances of a bigger half-point rate hike seem unlikely, along with a rate move in June. Money markets now price close to five 25bp hikes from the ECB by year-end and this consolidates the narrowing of European-US yields and rates that has been taking place recently. Importantly, this convergence is weakening the dollar as some traders begin to speculate if the greenback has peaked. EUR/USD has bounced strongly over the last few sessions but faces formidable resistance around the March low.
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