Forex Investment and Currency Trading

The ECB has just announced a 25 bp rate hike to 4.25%, as expected - and strongly hinted at last month’s press conference.

At last month’s press conference, it was clear that the pick up in inflation and inflation expectations was a major concern for them (”it is imperative tp secure that medium to longer term inflation expectations remain firmly anchored”) - but since then, inflation has pushed still higher while economic activity indicators have come in slightly stronger than expected. So, in spite of stock markets and concerned politicians, the ECB felt obliged to follow through on their threat.

The key issue now is whether this is indeed the last hike, as they have seemed to indicate following their June meeting, or whether more is needed to secure inflation expectations. Very tough call because nobody really knows how to forecast inflation expectations - the new (and temporary) target, it appears. First hint of their intentions may come at the press conference, starting 13.30 London time. Specifically:

1. They’ll revert to “monitor very closely all developments” instead of “heightened alertness” (meaning: no rate change in August), but….

2. … they will NOT re-introduce “we believe that the current monetary policy stance will contribute to achieving our objective” (meaning: we don’t intend to hike again later this year, but we will not box ourselves in with that statement at this time.)

3. When discussing the medium term inflation outlook in June, they added that the risks “have increased further”. Market suspects that they’ll keep that one in there this time (how could they not, in spite of the fact that we must be closer to the peak now).

4. Look out for this new sentence from June (opening sentence following the risks to the medium term inflation outlook): “it is imperative to secure that medium to longer term inflation expectations remain firmly anchored in line with price stability”. Key word here is “remain”. The sentence is expected to be repeated as is, but any fiddling with it would be importance.

During the Q&A, the ECB’s communication policy will be put under significant pressure when journalists will try and figure out whether they really think that this one hike indeed will be enough. The best guess is that Trichet will try to leave the door open for yet another hike. He’ll be uncomfortable when asked: “what will you do if inflation expectations do not remain in line with price stability despite [today's] interest rate move?”