ECB Hikes Rates by 50bp

​Today is a historic day for the European Central Bank. They have hiked interest rates for the first time since 2011 by 50bp. In addition, softening forward guidance shows that the ECB thinks the opportunity for a series of rate hikes is limited. In this article, we'll take a closer look at the ECB's announcement.

The ECB's Announcement
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• All three key ECB interest rates were increased by 50bp.
• Forward guidance was changed to a “meeting-by-meeting” approach.
• A Transmission Protection Instrument (TPI) was introduced.

The decision to hike by 50bp took some by surprise. In fact, since the June meeting the ECB had repeatedly confirmed its ‘intention’ to hike rates by 25bp in July, before accelerating the hiking pace from September onwards. 
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Today's rate hike isn't going to bring down inflation in the short term, not even on the demand side of the economy. In fact, the demand side will react significantly more to a recession, if indeed, a recesssion is looming. The objective of the hike and any further potential hikes, is to bring down inflation expectations. There is also the issue of ECB's damaged reputation as an inflation fighter and today's announcement helps to repair this. Does this mean that the ECB is more concerned about their credibility over being predictable?

Forward Guidance
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Cast your mind back to the end of last year and you may remember the ECB president Christine Lagarde giving her own personal forward guidance that she was not expecting rate hikes in 2022. Fast forward to the June 2022 meeting where a 25bp hike was the intention for July, and now we see that this was wrong. Perhaps forward guidance is no longer a useful tool for central banks, particularly in times of high uncertainty. Perhaps it would be pragmatic to take any further forward guidance from the ECB about rate hikes beyond September, with a  pnch of salt!