European Central Bank Poised to Raise Rates as Global Inflation Remains High
The European Central Bank (ECB) is widely expected to raise interest rates by 50 basis points, taking the deposit rate to 3.00%.[0] This would be the third consecutive hike of 50bps, and the highest rate since 2008. There is a growing split between the hawks and the doves within the Governing Council, leaving the path forward more complicated.[1] The ECB has hiked their base by 300bp so far this tightening cycle. Money markets are fully pricing in a 4% terminal rate, which leaves the door open for another 50bp hike in May, and some members of the ECB have been calling for as much as 4x 50bp hikes to take rate to 5%.[2]
Next week, the US inflation report and the European Central Bank's policy meeting will draw attention while investors anticipate more rate hikes.[1] Though inflation has been decreasing, it is still quite high.[3] Even though the disruption of supply chains has been mitigated, government spending during the pandemic, international tensions, and the lowest unemployment rate in history are still driving prices higher than what is considered comfortable.[3] The Federal Reserve's favored measure of domestic-induced inflation, Core services ex-rents, increased slightly in January and will be carefully monitored for any evidence of abatement.[4] The Federal Reserve Bank of Cleveland releases inflation forecasts each weekday, and is anticipating February’s CPI will mimic January’s stronger than wanted month-over-month jump of a half percent.[3] Chairman Jerome Powell has made it clear that the Fed is “prepared to increase the pace of rate hikes” if the data points to it.[3] If inflation remains above the Federal Reserve's target of 2%, they will likely continue to implement tighter monetary policy.[3]
0. “Euro to Dollar Rate Tipped as Buy Ahead of ECB Decision and Forecast Update” Pound Sterling Live, 10 Mar. 2023, https://www.poundsterlinglive.com/eurusd/18329-euro-to-dollar-rate-tipped-as-buy-ahead-of-ecb-decision-and-forecast-update
1. “Week Ahead – US inflation, ECB decision to test markets’ nerve” Investing.com, 10 Mar. 2023, https://www.investing.com/analysis/week-ahead–us-inflation-ecb-decision-to-test-markets-nerve-200636097
2. “The Week Ahead: ECB Meeting and US Inflation in the Spotlight” Action Forex, 11 Mar. 2023, https://www.actionforex.com/contributors/fundamental-analysis/490451-the-week-ahead-ecb-meeting-and-us-inflation-in-the-spotlight/
3. “The Week Ahead: As inflation simmers and interest rates rise, investors stew” Brunswick News, 10 Mar. 2023, https://thebrunswicknews.com/news/national_news/the-week-ahead-as-inflation-simmers-and-interest-rates-rise-investors-stew/article_aa9bce6c-3beb-5b19-a257-9f8653034ca5.html
4. “U.S. Inflation Easing, But Still Sticky” Action Forex, 11 Mar. 2023, https://www.actionforex.com/contributors/fundamental-analysis/490433-u-s-inflation-easing-but-still-sticky/
