The ECB will raise interest rates for the 7th time in the fight against inflation

Inflation figures and ECB’s latest Bank Loan Survey results strengthen the case for a cut to 25 basis points,

Frankfurt ( – The European Central Bank (ECB) will raise interest rates for its seventh straight meeting on Thursday, as a long fight against stubborn inflation continues, with only the size of the measure remaining open to debate.

The central bank for the 20-nation euro zone has raised interest rates by a record 350 basis points since July in hopes of stopping the runaway growth in prices. But returning inflation to its 2.0 percent target is still years away, leaving policymakers with no choice but to tighten policy again this month and beyond.

A 25 basis point move, decelerating after three successive 50 basis point hikes, appears the most likely outcome, although a bigger increase is still a possibility that is almost certainly not the end of a historic tightening cycle.

Also read: Yen falls to 15-year low vs euro as BoJ contrasts with ECB

The decider could be a compromise among policy makers on what signal to send about future hikes.

Conservative hawkish who held a majority on the Board of Governors, leaned toward a larger increase.

But they have signaled they could compromise on smaller steps as long as the ECB shows that May is not the end of its run, even if some peers – notably the US Federal Reserve – may reach their own rate peaks.

Another issue is how willing the majority of ECB Chair Christine Lagarde is to support the decision.

Lots hawkish could live with smaller steps given the right guide but mate dovish they are likely to voice loud dissent in the event of a bigger hike, leaving the ECB once again speaking with many voices, seen as a weakness for years.

Part of the compromise could be a deal to end reinvestment from July on maturing debt purchased under the ECB’s 3.2 trillion euro Asset Purchase Program – a modest move that would further shrink banks’ ballooning balance sheets, even if the impact on inflation would be small.

The market sees an 80 percent chance of a 25 basis point increase while most economists polled by Reuters are also betting on a smaller increase.

Supporting the possibility of a ECB cut, the US Federal Reserve raised interest rates by 25 basis points on Wednesday (3/5/2023) and signaled it would halt further hikes.

Economic fundamentals provide ample fodder for both sides of the argument.

Supporting the case for smaller moves, the eurozone economy barely grew in the last quarter and loan figures showed the biggest drop in credit demand in more than a decade, suggesting past interest rate hikes are starting to hit the economy.

Also read: The US Federal Reserve raises interest rates by 25 basis points

If squeezed hard, this credit crunch could turn into a full-blown credit crunch, weighing on growth that was barely in positive territory to begin with.

At 3.0 percent, the ECB’s deposit rate is already curbing economic activity, and base inflation has also stopped rising – at least for now.

“Inflation figures and the latest ECB Bank Loans Survey results strengthen the case for a cut to 25 basis points,” BNP Paribas said in a note. “At the same time, today’s data also underscores that interest rates should rise further – we confirmed our expectation of a terminal rate of 3.75 percent.”

Hawkish argue that underlying price growth remains too high and suggests inflation could be above the ECB’s target unless the bank acts more aggressively.

Also read: Dollar holds on to losses after Fed raises interest rates, signaling pause

They say these risks are exacerbated by a tight labor market, especially as wage growth has been faster than expected and the unemployment rate has fallen to an all-time low despite a near-recession environment.

“Business surveys show an improvement in growth, potentially exacerbating labor market tightening, while the policy rate is just 1 percentage point above our neutral estimate,” said JPMorgan economist Greg Fuzesi, predicting a move of 50 basis points.

The ECB will announce its policy decision at 1215 GMT and Lagarde will hold a press conference at 1245 GMT.

Translator: Apep Suhendar
Editor: Nusarina Yuliastuti


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