The ECB's interest rate decision is higher than the consensus forecast, but it comes alongside a very dovish statement, which is hitting the euro
The European Central Bank (ECB) raised interest rates by 25 basis points in its announcement following today's meeting (September 14). However, the EUR/USD slipped more than 0.5% to its lowest level since June in the 1.0650s as the ECB declared the end of its monetary tightening cycle.
The ECB raised the deposit interest rate from 3.75% to 4.00% this afternoon. Meanwhile, the marginal lending facility rate increased from 4.50% to 4.75%.
The ECB's interest rate decision is higher than the consensus forecast. The consensus had previously predicted that the ECB would keep interest rates unchanged at this month's meeting and only raise them at the next meeting.
A more hawkish and unexpected interest rate decision typically triggers strengthening the currency exchange rate. Unfortunately, the ECB's interest rate hike was accompanied by a very dovish statement, which hurt the euro.
According to the ECB's Governing Council, the main ECB interest rates have reached a level which, if sustained over an adequate duration, would significantly aid in achieving the inflation target within the desired timeframe.
Analysts expect the ECB to maintain the results of today's interest rate hike in the coming months. Eurozone government bond yields subsequently plummeted, along with the euro exchange rate.
Andrew Kenningham, chief Europe economist at Capital Economics, said: "The ECB's decision to raise interest rates by a further 25 bps today probably brings the current tightening cycle to an end."
"But given the strength of underlying inflation, we expect rates to remain at this level for at least a year, even though the economy seems to be heading for a recession," he added.
According to Mike Bell of JP Morgan Asset Management, business survey data in the Eurozone suggesting a significant near-term growth slowdown implies that the ECB has likely completed its interest rate hikes, as reported to Reuters.
ECB President Christine Lagarde delivered a more hawkish statement during her press conference shortly afterward. She emphasized that most ECB members approved the current ECB interest rate hike. She also declined to specify whether the ECB had reached the terminal interest rate peak and refrained from indicating how long interest rates would remain at their current level.
Nevertheless, the euro continued its decline as of the time of writing at the beginning of the New York session. The market brushed aside the hawkish tone in Lagarde's statement. Data indicates that the market believes the ECB is unlikely to raise interest rates further and may begin cutting rates in March 2024.