Thursday, March 23, 2023

The ECB will raise its rates due to inflation and despite the turbulence

The European Central Bank (ECB) will foreseeably maintain this Thursday the path of interest rate rises because it has not yet won the battle against inflation and despite the turbulence in the financial markets after the bankruptcy of Silicon Valley Bank.

The ECB has shown for weeks its willingness to raise the price of money in the euro area on Thursday by half a percentage point, to 3.5%.

In this way, the deposit facility, for which money is paid to banks overnight, would be 3%.

But the bankruptcy of the US bank Silicon Valley Bank, which specializes in financing technology start-ups, has shaken financial markets and raised fears of contagion to many other banks around the world, as occurred after the collapse of Lehman. Brothers in 2008.

The US government has taken control of Silicon Valley Bank and has guaranteed deposits and the Federal Reserve (Fed) has guaranteed the supply of liquidity. This intervention has contained the panic in the markets.

Banks around the world plummeted on the stock market after the collapse of Silicon Valley Bank and markets began to think that the ECB is not going to raise interest rates by half a point on Thursday and will go for a smaller increase, of a quarter point.

However, most analysts believe that the ECB will maintain its plans for a half percentage point increase because it has not yet won the fight against inflation.

Headline inflation slowed to 8.5% in February, but core inflation rose to 5.6%.

The economist for Europe at the DWS manager, Ulrike Kastens, considers that “the ECB is far from reaching its inflation target in the medium term, so, as was already predicted at the February meeting, it is likely that it will rise again official interest rates by 50 basis points”.

“The core inflation rate, which rose to 5.6% in February, is likely to have alarmed members of the ECB’s Governing Council, especially given the prospect of further growth,” says Kastens.

In addition, Kastens adds, the labor market remains strong, wages will rise, and labor shortages will also continue to drive wage increases.

However, Kastens also points out that the first signs of a slowdown are visible, the economy is slowly losing momentum and loans, especially in the real estate market, are falling significantly.

Senior economist at Generali Investments Martin Wolburg believes “that the ECB will opt for increases of 50 basis points in the next two meetings (March and May).”

“Disinflation induced by energy prices will gain momentum in the coming months. But core inflation will remain much more stable,” according to Wolburg.

Bank of America’s chief European economist Rubén Segura-Cayuela expects a 50 basis point rise on Thursday and indications that May’s rise will also be half a percentage point unless core inflation improves sooner.

Segura-Cayuela believes that “the ECB is on the way to excessive tightening” because he considers that the economy has been and continues to be weak.

Allianz Global Investors’ global investment director of Fixed Income, Franck Dixmier, expects a 50 basis point rate hike on Thursday and that investors will pay more attention to any indication of the pace of future hikes.

“Given underlying inflationary pressures persist, we expect the central bank to continue to tighten monetary policy” as the economy is resilient, especially services, Dixmier said.

The ECB publishes its new forecasts for inflation and growth in the euro area on Thursday.

In December, he forecast growth in the euro area of ​​0.5% in 2023 with inflation of 6.3% and in 2024 growth of 1.9% with inflation of 3.4%.

The ECB forecast in December that inflation will be 2.3% in 2025, so it will still exceed its 2% target.


Please enter your comment!
Please enter your name here

Latest article