Oups she did it again

The ECB has raised interest rates again, from 2.0% to 2.25%, after headline inflation moved above 3%.

The explanation is a familiar one: inflation is too high and the ECB needs to act. This time, however, the inflation shock is largely imported, linked to energy and geopolitical tensions, while growth is already slowing.

That makes the decision more difficult to understand.

The ECB has also lowered its GDP forecasts for this year and next year. In other words, it is tightening monetary policy in an environment where inflation is rising, but growth is weakening.

The rate hike was widely expected by the market. European equities were up yesterday, and US markets also moved higher, helped by hopes of a de-escalation around Iran.

Still, we ask ourselves whether this hike really makes economic sense — or whether it is partly about rebuilding room to cut rates later, should the growth outlook deteriorate more sharply.

At ECP, we continue to believe that central bank credibility is not only about acting, but also about acting consistently.