Frankfurt Rarely has the environment for the European Central Bank (ECB) changed as quickly as in the past seven days. Just a week ago, investors were assuming a series of further interest rate hikes in the euro area.
But in view of the dynamics of the past few days, experts are currently very cautious when making forecasts. “The ECB decision should be announced in 24 hours. That seems like a long time at the moment,” wrote Danish Danske Bank economist Piet Christiansen a day before the council meeting.
It will not only be interesting to see whether the ECB will go through with the increase, but also whether it will signal similar steps for the meetings that follow, as it did recently. Investors are likely to pay particular attention to questions about the risks in the banking sector. In addition, the ECB is presenting new forecasts for inflation and growth.
The Handelsblatt summarizes the four points that matter on Thursday:
1. Is the ECB raising interest rates?
Actually, the rate hike on Thursday was a foregone conclusion. ECB President Lagarde had clearly signaled this several times. “Given underlying inflationary pressures, we plan to hike interest rates by a further 50 basis points at our next meeting in March,” she told the European Parliament in mid-February, for example.
In view of the recent turbulence following the bankruptcy of the SVB, however, there are voices urging the central bank to exercise caution. Former ECB board member Lorenzo Bini Smaghi pleaded in the “Börsen-Zeitung” for a change in the central bank’s interest rate hike plans.
However, most economists assume that the central bank will stick to its plans. Among other things, because a deviation from the markets could be taken as an alarm signal. “The risk that the ECB will raise interest rates by 25 basis points is not zero, but it is small,” says Frederik Ducrozet, economist at Swiss wealth manager Pictet.
The economist at the French investment bank Natixis, Dirk Schumacher, takes a similar view. “The contagion effect seems to be moderate at the moment and does not justify any deviation from the announced plan,” he says.
The central bank’s leeway is considered limited, primarily because core inflation in the euro area recently rose to a new record high of 5.6 percent. This is the highest level since monetary union began. This means the price increase adjusted for energy and food. Central bankers pay close attention to core inflation because it is considered a good indicator of the medium-term inflation trend.
2. How will interest rates develop in the coming year?
It will also be interesting to see how Lagarde comments on the further development of interest rates beyond March. In December and February, the ECB not only raised interest rates, but also signaled further hikes at the next meeting.
This practice was quite controversial in the Council, because it is somewhat at odds with the statement that one always wants to act on the data. ECB Executive Board member Fabio Panetta spoke out against pre-determinations in an interview with the Handelsblatt in February.
>> Read here: ECB Director Fabio Panetta against committing to rate hikes beyond February
According to central bank circles, there will probably not be any further determinations in the future. It is striking that investors have dramatically adjusted their interest rate expectations in the past seven days.
On Tuesday last week, the futures markets priced in a maximum rate of around four percent for this year for the deposit interest rate in the euro area. This rate, which is decisive for the financial markets, is currently 2.5 percent. In the meantime, however, only a maximum rate of three percent is priced in.
3. How is it reacting to the turbulence in the banking sector?
In addition, Lagarde is likely to be asked questions about the stability of the banking sector. It is now also conceivable that the central bank will indicate support options.
One starting point could be to make it easier for banks to access liquidity. This is what the economist at the major Dutch bank ING, Carsten Brzeski, expects: “I think that the ECB will promise or even announce relief.”
For example, one option would be that the ECB could relax the security requirements for refinancing operations. The US Federal Reserve has already decided something similar. Another possibility would be that the ECB will continue the cheap long-term loans for banks under the acronym TLTRO.
4. To what extent is the ECB changing its forecasts?
Lagarde will also present the ECB’s new forecasts for growth and inflation in the euro area. Jari Stehn, economist at US bank Goldman Sachs, expects the ECB economists to raise their forecasts for core inflation for this year, but for headline inflation for this year and the next two years will weaken somewhat.
What is particularly uncertain is how core inflation will continue. The head of the Austrian central bank, Robert Holzmann, who is regarded as an advocate of a particularly tight monetary policy, said in an interview with the Handelsblatt that he did not expect any significant weakening in the first half of the year. In this case, he expects the ECB to raise interest rates four times this year by half a percentage point.
More: Trade union confederation warns ECB against further interest rate hikes – “Collateral damage would be enormous”