ECB Set to Raise Rates Despite Recent Financial Turmoil
On Thursday, the European Central Bank (ECB) is expected to announce a 50 basis point hike to 3%, which would mark the sixth consecutive rate increase since the ECB began hiking in July of last year. This move is largely in line with the Governing Councils’ recent guidance and could potentially be followed by a further 25bp hike in May.
Inflation in the Eurozone has cooled slightly to 8.5% year-over-year, largely due to lower energy prices, yet the core rate of inflation has actually accelerated to 5.6%.[0] Wages, which are difficult to track in Europe, appear to be rising, though it is unclear if this is a temporary or sustained increase.[1]
The expected ECB rate hike comes despite the sudden collapse of a number of U.S. banks last week, which has caused some to question the move. However, the ECB has indicated its intention to proceed, and the Federal Reserve has announced a Bank Term Funding Program (BTFP) to bolster confidence in the financial system.[2]
The debate about the future course of action for the ECB is complicated by the financial risks that have been brought to the forefront by the collapse of Silicon Valley Bank (SVB). While market participants have dramatically scaled back their bets with regards to the Fed’s future course of action, they are also doubting whether the ECB should proceed as aggressively as it signaled at its latest policy meeting.[3]
Dovish policymakers are likely to argue that the changing economic environment would warrant more caution in regard to policy tightening.[4] They may push for a smaller rate hike, or even a pause, to avoid an overly hawkish stance. Ultimately, the outcome of the meeting will be driven by data dependency, forward guidance, and views on inflation and growth.
0. “ECB Meeting: Is a 50bps Hike Still a Done Deal?” Action Forex, 14 Mar. 2023, https://www.actionforex.com/contributors/fundamental-analysis/490924-ecb-meeting-is-a-50bps-hike-still-a-done-deal
1. “Suddenly a half-point ECB hike isn't guaranteed after bank collapses in U.S. and share price slides in Europe” Morningstar, 15 Mar. 2023, https://www.morningstar.com/news/marketwatch/20230315290/suddenly-a-half-point-ecb-hike-isnt-guaranteed-after-bank-collapses-in-us-and-share-price-slides-in-europe
2. “Nothing much on the agenda in Europe today” ForexLive, 13 Mar. 2023, https://www.forexlive.com/news/nothing-much-on-the-agenda-in-europe-today-20230313/
3. “ECB Cheat Sheet: Predictably unpredictable” ING Think, 13 Mar. 2023, https://think.ing.com/articles/ecb-cheat-sheet-predictably-unpredictable
4. “ECB's Hawkish Plans Set to Face Bolder Opposition on SVB Fallout” Bloomberg, 13 Mar. 2023, https://www.bloomberg.com/news/articles/2023-03-13/ecb-s-hawkish-plans-set-to-face-bolder-opposition-on-svb-fallout
