Was the ECB so conciliatory yesterday?

After yesterday’s ECB policy decision and Lagarde’s presser, markets interpreted the ECB as more dovish. We saw rates fall and the Euro also fell as the Dollar came back into favor. So what were the main triggers?

I think the first was when Lagarde mentioned that the risks to the inflation outlook are now seen as “more balanced”. While she didn’t follow Powell in calling it a “disinflationary,” it was also a big step up from their earlier tone on the inflation outlook. Check one.

The second for me was Lagarde’s lack of firmness and clarity in presenting what will follow after the March meeting. The statement then committed to a 50 basis point rate hike, but was unsure what would follow with the statement that policymakers “will next assess the subsequent path of its monetary policy.”

Does this mean pausing or stopping the tightening cycle? It’s also something Lagarde hasn’t outright ruled out and that bit of uncertainty is enough to cast doubt on the markets as to their belief.

After that we had the usual ECB sources report to try to clear the air, but the damage was already done. Frankly, I wouldn’t be surprised if we got one or two more in the next few days or next week.

To sum up, I think there is a case of misconception here after ECB policymakers sounded the hawkish horn over the past few weeks and then suddenly to see Lagarde less firm in messaging today . It should have been simple, but the slight changes in language and communication were enough to fuel the broader markets, especially after the more dovish tone from the Fed and then the BOE beforehand.

At this point, central banks are moving towards greater reliance on upcoming data, which means markets will likely take the lead. I pointed out that this was the case for the Fed here and it looks like it will also apply to the ECB after March.


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