The ECB shows rising interest rates, and eyes move a lot in September

The European Central Bank said it would end its long-term stimulus package on Thursday, with the first rate hike since 2011 next month and a possible significant rate hike in September.

Inflation is at a record high of 8.1% and is still rising, so the ECB is now likely to see widespread inflation, transforming into a hard-to-break wage-price spiral, and stubbornly heralding a new era of high prices. I am concerned that there is.

Central banks of 19 euro-using countries have announced that they will end quantitative easing on July 1 and raise interest rates by 25 basis points on July 21. In the meantime, the inflation outlook will improve.

“We will see inflation return to its target of 2% in the medium term,” said ECB Governor Christine. Lagarde I said at a press conference. “It’s not just a step, it’s a journey,” she said of the move signaled on Thursday.

As the economy emerged from the COVID-19 blockade, sharp rises in prices were initially triggered by energy and food prices, but Russia’s invasion of Ukraine accelerated these trends and price increases were very widespread. So even the underlying inflation is running twice as fast as the ECB’s target.

The scale of rate hikes to curb inflation has been heavily debated by ECB policy makers, with chief economist Philip Lane preferring 25 basis points in July and September, while others prefer 50 bps. Insists on considering.

In support of their claim, the ECB has raised its inflation forecast again, expecting inflation this year to be 6.8%, up from the previous 5.1% forecast. Inflation of 3.5% in 2023 and 2.1% in 2024 is the fourth consecutive year of inflation overshoot.

This is too expensive, Lagarde He argued that a quicker rate hike would be needed to repeat these forecasts three months from now.

“If it’s 2.1% after 2024, will the adjustment increment be higher? The answer is yes.” Lagarde Said.

The next logical increment, the 50 basis point increase, will be the ECB’s largest one-time rate hike since June 2000. At minus 0.5%, the ECB’s deposit rates have been in the negative territory since 2014.

Behind the curve?

“Given the ECB’s hawkish signal, the central bank expects a 50 basis point move in both September and October to follow a 25 basis point rate hike in July,” Nordea notes to customers. I mentioned in.

“Then, the central bank slows down and could rise by 25 basis points in December.”

The market has risen with a rate hike of 144 basis points by the end of this year following the statement, rising from the previous 138 bp or at all meetings since July, some of which exceed 25 basis points. I did.

They also anticipate fluctuations in deposit rates totaling 240 basis points by the end of 2023, with interest rates peaking close to 2%.

“In very uncertain times, I think gradualism is probably appropriate, more than if the road is clear, clearly identified, and we all understand where we are heading.” It states. LagardeJust a few months ago, he said that this year’s rate hike is very unlikely.

Some economists argued that the ECB was already too late to tackle inflation, so raising interest rates to a neutral level that neither stimulated nor restrained the economy was not enough.

“The ECB is still lagging behind,” said Jorg Kramer, chief economist at Commerzbank.

“It’s not enough to take your foot off the gas. You also have to brake,” says Kramer. “But that’s exactly what it’s not ready to do, and that’s why we expect inflation to average well over 2% over the next few years.”

The ECB’s first rate hike over a decade has fallen behind most of its peers worldwide, including the Federal Reserve Board and the Bank of England, which are aggressively raising and promising more action. ..

Unlike the Federal Reserve, the ECB has no plans to shrink its balance sheet. Policy makers reaffirm their commitment to continue to reinvest maturity cash from the ECB’s € 5 trillion in public and private debt.

Even if she promises to raise rates Lagarde He vowed not to allow financial markets to significantly boost the cost of borrowing in former eurozone debt-crisis countries. “We commit and commit!” Lagarde Said.

The start of policy tightening is currently set, but the end point remains uncertain.

Lagarde The rate states that the ECB needs to move towards a neutral point that neither simulates nor suppresses growth. However, this level is undefined and unobservable, so investors will guess how far the ECB wants to go. Read the full text

(Reuters)