All eyes on the ECB

Kathrein Statement

11.07.2022

All eyes on the ECB

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This Thursday at the ECB meeting - "finally" - an interest rate hike is to be announced and implemented. The last rate hike was more than ten years ago, and since then it has been all downhill. As of September 2019, the deposit rate was unchanged at -0.50%. With the decision to end bond purchases at the June meeting, the European central bankers cleared the way for an interest rate hike and at the same time agreed that it would be 25 basis points. Now the question is "Is this enough?" This question is not new. It was already asked in June, after almost all central banks worldwide had moved into the rate hike cycle since the spring. For example, the US Fed has already implemented three rate hikes amounting to 150 basis points and even the Swiss National Bank raised its key interest rate by 50 basis points to -0.25% in mid-June.This Thursday at the ECB meeting - "finally" - an interest rate hike is to be announced and implemented. The last rate hike was more than ten years ago, and since then it has been all downhill. As of September 2019, the deposit rate was unchanged at -0.50%. With the decision to end bond purchases at the June meeting, the European central bankers cleared the way for an interest rate hike and at the same time agreed that it would be 25 basis points. Now the question is "Is this enough?" This question is not new. It was already asked in June, after almost all central banks worldwide had moved into the rate hike cycle since the spring. For example, the US Fed has already implemented three rate hikes amounting to 150 basis points and even the Swiss National Bank raised its key interest rate by 50 basis points to -0.25% in mid-June.
 
However, the question has become more topical since last week the Canadian central bank raised its key interest rate in a surprisingly large step from 1.50% to 2.50%, thus offering support to the "hawkish" camp. The magnitude shows a tendency towards the so-called "front load", as also implemented by the US Fed. What does this mean? As is well known, the inflation figures are at a very high level and the central banks are thus forced to raise their interest rates to counteract this development. Usually, interest rate hikes in such scenarios are gradual over the next few months. However, as the spectre of recession looms ever larger - and due to the gas supply issue, especially in Europe - there is a danger that the interest rates will be raised.There is a danger that the central banks - and especially the ECB - will not reach the desired interest rate level until the economic downturn is already noticeable on the other side. However, this would limit the central bank's room for manoeuvre, even if the primary goal is to fight inflation.
 
Hence the considerations on the "front load": with this measure, the interest rate hikes are already stronger at the beginning of the cycle. This provides a safety cushion to avoid falling into arrears once the recession has already set in. In the case of the ECB, it should also be borne in mind that the next regular meeting is not until September - although a rate hike of 50 basis points is currently expected, the question is whether this should not already take place this Thursday. Similarly, there is speculation that the US Fed, at its meeting on Wednesday in a week and a half, could make a more significant rate hike of 100 basis points than the 75 basis points previously expected. The likelihood of this is currently seen as slightly higher than for the ECB's half percentage point on Thursday.
 
Another topic that will occupy the ECB on Thursday is the already announced programme to curb the fragmentation of the yields of the euro states, which is needed more urgently than recently expected due to the acute crisis of Italy's government.
 
Thus... all eyes on the ECB!

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