The ECB had signaled for several weeks that it would be raising rates again at its March meeting, as inflation across the 20-member region remains sharply above the targeted level. In February, preliminary data showed headline inflation of 8.5%, well above the central bank’s target of 2%. Christine Lagarde, the president of the ECB, indicated the central bank was ready to announce further rate hikes to tackle high inflation and bring it down to its 2% target. Recent surprise hikes by central banks in Canada and Australia show a move higher could still happen, but Gapen said the Fed doesn’t usually hike rates when the widespread assumption on Wall Street is for a hold. The Federal Open Market Committee on Wednesday is expected to maintain its benchmark lending rate at the 5%-5.25% range, marking the first skip after 10 consecutive increases going back to March of last year.

• The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.
• Wage pressures have strengthened further as employees recoup some of the purchasing power they have lost as a result of high inflation.
• Business and consumer confidence indicators point to weak activity in the second quarter and remain lower than before Russia’s unjustified war against Ukraine and its people.
• The TPI will be an addition to the Governing Council’s toolkit and can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area.

The euro zone’s labour market is especially tight as employment is at an all-time-high and the jobless rate at a record low, despite the near-recessionary environment. Markets which had bet on rates peaking at 3.75% by September pared back their expectations. Investors now see the terminal rate at around 3.65%, indicating that one more hike is fully priced in but that opinion is split on a second move.

S&P Futures

Prior to these latest developments, the baseline path for headline inflation had already been revised down, mainly owing to a smaller contribution from energy prices than previously expected. ECB staff now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. Inflation excluding energy and food continued to increase in February and ECB staff expect it to average 4.6% in 2023, which is higher than foreseen in the December projections. Subsequently, it is projected to come down to 2.5% in 2024 and 2.2% in 2025, as the upward pressures from past supply shocks and the reopening of the economy fade out and as tighter monetary policy increasingly dampens demand.

The growth in prices fell in France to 5.8% from 6.1% in July, but increased in most other eurozone countries. “They know that getting caught in that loop of trying to support your currency through central bank actions is pretty dangerous as you need to tighten too much, hurting the economy and the currency,” said Janus Henderson’s Mulliner. Money markets have started to dial back expectations for the scale of ECB monetary tightening, and analysts say the ECB’s window of opportunity to hike could close sooner than hoped. But some policy hawks still worry that underlying price pressures are building, even if overall inflation has fallen sharply from last autumn’s double-digit readings. This suggests that previous rate rises are being transmitted “forcefully” to the economy but with the usual lags, the ECB said, a comment economists took as a key justification for slowing the pace of hikes. Some policymakers who spoke to Reuters after the meeting expected two or even three further hikes.

European Central Bank hikes interest rates, fuelling recession fears

Underlying inflation has also stopped rising – at least for the time being, and food inflation may have also peaked. “The ECB might not be convinced by the September meeting inflation is declining sufficiently to pause,” he said.

“This somewhat vague guidance supports the call that the ECB will likely lift rates again by 25 bps on 15 June and on 27 July, to a peak deposit rate of 3.75%.” But a significant minority saw at least one more rate hike from the Fed, more likely in July than June, which some say may give ECB policymakers further incentive to also raise rates in July to maintain the euro’s strength. “While incoming data point to resilience in activity and stickiness in inflation, the Fed appears to want additional time to monitor policy lags and regional bank stress,” Michael Gapen and other economists wrote in a BofA Global Research report. “The main take away from this meeting was higher than expected inflation projections and so the need for the ECB to hike more than anticipated by the market,” he said by email. Activity is being supported by lower energy prices, easing supply bottlenecks and fiscal policy support to firms and households.

Fed Is Set to Pause and Assess the Effect of Rate Hikes

Lagarde warned that risks to the inflation outlook were on the upside and have intensified, particularly as the war is likely to drag on, keeping energy prices high for longer. “We expect inflation to remain undesirably high for some time.” She listed driving factors including higher food and energy costs and wage rises. The Fed’s main benchmark is 2.25% to 2.5% after several large rate rises, including two of three-quarters of a point. The move follows a similar increase by the US Federal Reserve and is expected to put pressure on the Bank of England to follow suit when its policymakers meet next week to review the UK’s monetary policy. “The trade off the ECB is facing is more severe than any of the other major central banks,” said Silvia Ardagna, head of European economics research at Barclays.

Interest rate-sensitive two-year German bond yields and the euro fell on Thursday and money markets slightly trimmed their bets on the ECB’s peak rate, which they now see at 3.65%. These additional instruments have served us well and will remain part of our toolbox. They give our monetary policy more space to act against the risk of low inflation or deflation. At a press conference following the policy announcement, Lagarde said the economic outlook for the eurozone had improved since the ECB’s last policy update in April. Surveys were pointing to a “vigorous bounce back” for the service sector and manufacturing activity was also surging. Rising inflation has led to speculation about when and how the ECB will begin to slow asset purchases under PEPP, which was set up last year to keep finance flowing easily and cheaply to the real economy as the COVID-19 pandemic struck.

Economics

Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.75%, 4.00% and 3.25% respectively, with effect from 10 May 2023. As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations are contributing to its monetary policy stance. As concerns the PEPP, the Governing Council intends https://forexarticles.net/unholy-grails-a-new-road-to-wealth/ to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 2.50%, 2.75% and 2.00% respectively, with effect from 21 December 2022.

Here, the monthly inflation rate stagnated at too high a level relative to the Fed’s inflation target. The first day of the two-day FOMC meeting will see the release of May inflation data, which will feed into the FOMC’s decision. A stronger monthly increase in core inflation could swing the pendulum towards a 25bp hike. The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target. Accordingly, the Governing Council today decided to raise the three key ECB interest rates by 50 basis points and it expects to raise them further.

It also said that from the beginning of March 2023 it would begin to reduce its balance sheet by 15 billion euros ($15.9 billion) per month on average until the end of the second quarter of 2023. Markets face a decisive week, with the Fed and the ECB likely to put an end to their rate hike cycles

Markets will now focus on how long rates will stay high—as well as the Fed’s balance… Business and consumer confidence indicators point to weak activity in the second quarter and remain lower than before Russia’s unjustified war against Ukraine and its people. The manufacturing sector is still working through a backlog of orders, but its prospects are worsening. Meanwhile, the services sector remains resilient, owing in particular to the reopening of the economy after the pandemic. European officials were keen to stress that the situation in Europe is different from the one in the United States.

European Central Bank raises interest rates for first time in 11 years

Only the formulation that there is still more ground to cover should be repeated, signaling that interest rates are likely to rise further. Ultimately, however, everything will depend on the development of the upcoming data. The momentum of core inflation should weaken during the coming months, so that interest rates should be left unchanged from the September meeting of the ECB Governing Council. Overall, inflation developments, and thus the ECB’s further monetary policy beyond July, remain uncertain.

The yield spread between Italian and German 10-year bonds widened during Lagarde’s news conference to near the 250 basis point level that triggered an emergency ECB policy meeting last month. The ECB raised its benchmark deposit rate by 50 basis points to zero percent, breaking its own guidance for a 25 basis point move as it joined global peers in jacking up borrowing costs. Rising eurozone inflation, which reached a record rate of 9.1% last month amid rocketing natural gas prices, has forced the ECB to tear up its usual rule book of incremental increases.

Christine Lagarde: key issues she must address at the ECB

The Governing Council today decided to raise the three key ECB interest rates by 50 basis points and, based on the substantial upward revision to the inflation outlook, expects to raise them further. In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target. The Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach. The key ECB interest rates are the Governing Council’s primary tool for setting the monetary policy stance.

The Governing Council judged that it is appropriate to take a larger first step on its policy rate normalisation path than signalled at its previous meeting. This decision is based on the Governing Council’s updated assessment of inflation risks and the reinforced support provided by the TPI for the effective transmission of monetary policy. It will support the return of inflation to the Governing Council’s medium-term target by strengthening the anchoring of inflation expectations and by ensuring that demand conditions adjust to deliver its inflation target in the medium term. Initial pressures on the banking sector emerged last week, when U.S. authorities deemed Silicon Valley Bank insolvent.

The Governing Council today also decided on the modalities for reducing the Eurosystem’s holdings of securities under the asset purchase programme (APP). As communicated in December, the APP portfolio will decline by €15 billion per month on average from the beginning of March until the end of June 2023, and the subsequent pace of portfolio reduction will be determined over time. For the Eurosystem’s corporate bond purchases, the remaining reinvestments will be tilted more strongly towards issuers with a better climate performance. Without prejudice to the ECB’s price stability objective, this approach will support the gradual decarbonisation of the Eurosystem’s corporate bond holdings, in line with the goals of the Paris Agreement.