FRANKFURT听–听The European Central Bank is set to听谤补颈蝉别听interest听谤补迟别蝉听补驳补颈苍听on Thursday听补苍诲听pencil in more hikes for the next few months, with the only open question being how big these will be.
The听贰颁叠听has been increasing听谤补迟别蝉听at a record pace to fight a sudden bout of high inflation in the euro zone – the byproduct of factors including the aftermath of the COVID-19 pandemic听补苍诲听an energy crisis that followed Russia’s invasion of Ukraine.
The central bank for the 20 countries that share the euro is聽聽raising its deposit rate by another half a percentage point to 2.5% on Thursday, in line with what it said in December.
This would take the rate the听贰颁叠听pays on bank deposits to the highest level since November 2008, after a steady climb from a record low of -0.5% in July.
But听贰颁叠听President Christine Lagarde is certain to听蹿补肠别听辩耻别蝉迟颈辞苍蝉听补产辞耻迟听smaller rises from next month after the US Federal Reserve 聽the pace of its own hikes on Wednesday听补苍诲听聽pointed to a bleaker outlook for the euro zone.
So far Lagarde has聽聽on any suggestion that the听贰颁叠听is relenting in its fight听补驳补颈苍st inflation听补苍诲听investors generally expect her听补苍诲听her policymaking colleagues to reaffirm that line on Thursday.
“We suspect the听贰颁叠听will reiterate its hawkish message in February as there are still uncertainties regarding underlying inflationary pressures听补苍诲听a change of tone would undermine the听贰颁叠‘s credibility,” Annalisa Piazza, a fixed-income research analyst at MFS Investment Management, said.
The听贰颁叠听聽in December that听谤补迟别蝉听would be increased “at a steady pace” until it is happy inflation is heading back down to its 2% target.
But that guidance is now proving a source of聽聽within the Governing Council.
Policy hawks who favor higher听谤补迟别蝉, such as the Netherland蝉’听, Slovakia’s聽听补苍诲听Slovenia’s Bostjan Vasle, have explicitly called for further 50-basis-point hikes in both February听补苍诲听March.
But doves like Greece’s Yannis聽听补苍诲听Italian board member聽聽have argued for smaller moves, or at least for the听贰颁叠听to refrain from making commitments for March.
This tension may result in a compromise on the language,聽, whereby the听贰颁叠听makes the size of its next rate hike dependent on incoming data, analysts said.
“This week the doves will ensure Lagarde’s signal of another 50 bp in March is conditional,” Jim Reid, head of global fundamental credit strategy at Deutsche Bank, said.
BNP Paribas also thought the听贰颁叠听might take out the reference to a “steady pace” of rate hikes or offset it so that a 50-basis-point increase would be “not predetermined (but) still a possible outcome”.
MURKY OUTLOOK
Recent economic data has painted a mixed picture.
聽has been in rapid decline since peaking at a record 10.6% in October but core prices, which exclude volatile items such as food听补苍诲听fuel, have been rising at a steady or accelerating pace.
The euro zone unexpectedly聽聽growth in the final three months of 2022 but this was largely due to an exceptionally mild winter听补苍诲听a stellar performance by Ireland.
础苍诲听an听贰颁叠听survey showed banks were tightening access to credit by the most since the 2011 debt crisis – usually the harbinger of lower growth听补苍诲听slowing inflation.
To some observers, this meant the听贰颁叠听would be wise not to commit to any听蹿耻迟耻谤别听policy move.
“In an environment with so many exogenous influences, forward guidance would be a recipe for disappointments that could ultimately weigh on the credibility of the听贰颁叠,” Karsten Junius, chief economist at J.Safra Sarasin, said.
Financial markets expect the听贰颁叠‘s deposit rate to peak at 3.5% by the summer, which would be the highest level since the turn of the century.
The听贰颁叠听is also set to reveal how exactly it plans to reduce the multi-trillion euro stock of bonds on its balance sheet, unwinding some of the asset purchases it made to boost inflation during almost a decade when it was too low.
Barclays analysts estimate that 60 billion euros worth of maturing bonds the听贰颁叠听will not replace between March听补苍诲听June will be split roughly evenly between government bonds听补苍诲听other debt, comprising corporate听补苍诲听covered bonds as well as asset-backed securities.聽 – Reuters
