(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

 

LONDON - European Central Bank President Christine Lagarde has sprung a surprise worthy of her UK counterpart, Andrew Bailey. The Frenchwoman left interest rates unchanged on Thursday whereas the Briton raised them. Yet she was the one that made the bigger splash with a change of tune on inflation prospects that suggested the ECB might join its global peers this year in raising interest rates.

Lagarde dropped the central bank equivalent of a bombshell by saying that euro zone inflation, which hit a record high of 5.1% in January, was likely to stay elevated for longer than previously anticipated and that risks were now tilted to the upside. This was a big admission for a central bank tasked with ensuring price stability, and a shift from Lagarde’s previous stance that high inflation was less of a risk in the euro zone than in other major economies. Traders therefore jumped to the conclusion that Lagarde was gearing up to raise rates, even though she had previously said such a move was unlikely this year.

Granted, money markets were on Wednesday already implying a 30 basis point increase in the ECB’s key policy rate by December 2022. But by the time Lagarde had finished speaking on Thursday, they were assigning a probability of more than 90% to a June hike. Nor were they the only market to gyrate in response to Lagarde’s comments. The euro shot up more than 1% from the lows it had set against sterling after the Bank of England raised interest rates by a quarter percentage point to 0.5%. And government bond yields rose across the euro zone.

Lagarde declined to clarify how close the ECB was to ticking all the boxes needed to raise interest rates and said rate-setters would have new staff forecasts to guide them at their March meeting. Traders and investors have, however, already made their minds up about what the central bank is going to do, whether or not this was her intention.

Bailey at the BoE has some experience in investors extrapolating too much from what he says. While the quarter percentage point rate hike that he delivered on Thursday was in line with their expectations, some of his past decisions have caught markets off guard and caused asset price gyrations. Lagarde has, hopefully, learnt the lesson from others’ experiences and sent the message she actually wanted to convey.

 

CONTEXT NEWS

- European Central Bank President Christine Lagarde said on Feb. 3 that euro zone inflation was running hotter than expected and that risks were tilted to the upside.

- Speaking after the ECB kept its policy unchanged, Lagarde told a news conference that policymakers would not rush into new moves, but also chose not to repeat her past comment that a rate hike was very unlikely in 2022.

- The euro and government bond yields across the euro zone shot higher. The single currency appreciated to 83.85 pence against sterling, up more than 1% from the lows it had hit after the Bank of England raised interest rates by a quarter percentage point to 0.5%.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Neil Unmack and Oliver Taslic) ((For previous columns by the author, Reuters customers can click on PATTANAIK/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe | swaha.pattanaik@thomsonreuters.com; Reuters Messaging: swaha.pattanaik.thomsonreuters.com@reuters.net))