ECB hikes rates by 25bp, What Now?

The European Central Bank hikes rates by 25bp and doesn't seem to blink, despite the latest batch of disappointing macro data. 

The ECB has raised its main policy interest rates by 25 basis points last night, bringing the deposit interest rate to 3.75%. What's particularly noteworthy is that the policy statement accompanying this decision has left the possibility of further rate hikes wide open, without adopting a more cautious tone. 

Given the pre-announcement in June, it was inevitable to raise interest rates yesterday. The ECB has been quite explicit that the risk of prematurely halting rate hikes is far greater than going too far in their implementation.

However, negative data from the eurozone, such as weak PMIs, a weak Ifo index, a decrease in demand for new bank loans, stricter lending standards, and weak loan growth, must have significantly impacted sentiment in the Euro Tower, despite not being reflected in the policy statement. The ECB appears to be at risk once again, not for being too lenient on inflation, but for being overly optimistic and lenient regarding the economic impact of its own policy measures. There's a concern that they might fall behind the curve.

Looking ahead, the initial announcement today keeps the door open for potential future rate hikes, but with a very wide explained DATA dependent approach following today on. The statement mentioning inflation coming down but staying above the target "for an extended period" doesn't indicate that the ECB is ready to halt the rate hikes. It seems that the decision might be dependent on the comments made by ECB President Christine Lagarde during the press conference. For the central bank to refrain from further rate hikes, their own growth and inflation projections in September would need a significant downward revision.

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