ECB Governing Council Review: Uncertainty persists

■　ECB Governor Lagarde does not mention a specific “terminal rate” or “neutral interest rate”, and uncertainty persists

 On September 8, the European Central Bank (ECB) raised its main policy rate by 75 basis points at its Governing Council meeting. The rate hike was the largest since the ECB was established, in response to the results of the euro zone's consumer price index (HICP) in August. The index's year-over-year gain hit an all-time high. There has been no further announcement of unconventional monetary policy measures, including details of the "transmission protection measures (TPI)" announced in July. This time's main points are (1) the specific rate of future interest rate hikes, and (2) economic prosperity.

 For the specific rate of future interest rate hikes, it is necessary to pay attention to the "neutral interest rate (the level that neither stimulates nor suppresses the economy)" and "terminal interest rate (the ultimate destination of interest rate hikes)" assumed by the ECB. "The level is unknown," ECB President Christine Lagarde said in a question-and-answer session at a news conference, and "the ECB will certainly raise interest rates to curb inflation." The “data rate hike” policy announced by the Executive Board in July has been maintained, and forward guidance has not been restored. ECB President Christine Lagarde said she would continue raising rates at "two or more but less than five" Governing Council meetings, including in September. But it's unclear to what extent this will be reflected in market pricing.

 As for economic sentiment, focus on the latest economic forecasts from the ECB staff and the ECB's outlook for the European economy. In terms of economic forecasts, since June last year, the economic growth forecast has been lowered and the inflation rate forecast has been raised. The European Central Bank, citing high inflation as the basis for continued rate hikes, predicts a significant slowdown in the economy by the end of the year. However, even at this point, the economy is not expected to decline in the main scenario. There are persistent voices in financial markets that are more optimistic than the outlook for the Bank of England (BOE). When asked about this, ECB President Christine Lagarde said, "In an unfavorable scenario, we would expect a recession." Going forward, financial markets are likely to continue to correlate with European economic trends and European gas prices hook up.

Taken together, the ECB's monetary policy stance does not appear to have removed uncertainty, judging from the statement issued after the Governing Council meeting and the press conference by ECB President Christine Lagarde. Therefore, I expect the sense of instability in European financial markets to persist.