Highlights:

• At today’s meeting the ECB’s Governing Council (GC) lifted its key rates by another 25 bps, in line with expectations. It confirmed to stop of APP reinvestments from July onwards while sticking to its intention to continue PEPP reinvestments at least until the end of 2024. 
• As in the previous meeting, inflation is seen as “too high for too long”. However, the Governing Council acknowledged that “inflation has been coming down”. It also no longer sees uncertainties regarding the effect of its policy but sees it “gradually having an impact across the economy”. Tighter financing conditions are a key reason why inflation is set to “decline further towards target”. 
• The updated macro projections see headline inflation still averaging 3.0% in 2024 and GDP expanding healthily in 2023 and around potential in the 2024/25. The upward revision of core inflation is outstanding (by 0.5 pp in 2023 and 2024) and largely reflects higher labour costs. It also became clear from the press conference in between the lines that the GC sees the risk of second-round effects.  
• Looking ahead, the GC reiterated that “interest rates will be brought to levels sufficiently restrictive” and President Lagarde stated that, barring a material change in the baseline scenario, a further hike in July is in the offing. We continue to look for one more 25 bps hike by then. 
• However, we think that the end of the hiking cycle is nearing. We deem the ECB’s growth outlook too optimistic and think that the September macro forecast update will rather argue in favour of a pause. But as the tone of today’s press conference was rather hawkish, we acknowledge the risk of an additional September rate hike, which we fear would imply overtightening and the risk of low growth for longer.  
   

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