By moving first, the ECB has positioned itself as the most hawkish of the world’s major central banks. But whether that is remembered as leadership or as a replay of the ECB’s ill-fated 2011 rate hikes will depend less on events in Frankfurt than on developments in the Middle East.
The decision drew praise from economists including Ifo President Clemens Fuest, who said raising rates was “the right step at this point” given high inflation and little hope of a de-escalation in the conflict with Iran.
ZEW economist Friedrich Heinemann also applauded the ECB’s move. “Faced with the trade-off between supporting growth and maintaining price stability, the Council is clearly siding with price stability. That deserves praise,” he said.
Yet, others fear the ECB is repeating a familiar mistake by tightening policy in response to an external energy shock just as the economy weakens — echoing its rate hikes in 2011, when the ECB raised rates twice, only to be forced into a U-turn months later as the economy tanked.
“If the ECB were to go beyond the June hike, the eurozone may fare even worse with a risk that it could even fall into an unnecessary recession,” warned Berenberg Chief Economist Holger Schmieding after the press conference.
Lagarde also dismissed these concerns.
“The main risk would be not to take that kind of decision,” she asserted. “It’s not as if we are in an environment where growth is absent or under significant threat,” she said, pointing to updated growth forecasts that see the economy expanding by 0.8 percent this year, 1.2 percent in 2027 and 1.5 percent in 2028.