ECB preview: How to hike rates without creating more market turmoil
The European Central Bank (ECB) is poised to raise interest rates by 25 basis points next week amidst persistent energy-driven inflation, reflecting a robust resilience in the eurozone economy. Per the full note from ing-think, while the hike aligns with previous ECB sentiments, any further increases in rates would be precarious given the ongoing energy market volatility and potential economic vulnerabilities. Currently, headline inflation is projected to remain above 3% year-on-year for the rest of the year, although core measures do not indicate immediate alarm. The market will be closely watching for confirmation of this rate hike as key economic indicators from the Eurozone maintain a delicate balance between growth and inflationary pressures.
What the desk is arguing
The ECB is anticipated to implement a 25bp rate hike during its upcoming meeting, primarily due to the persistent rise in energy-driven inflation. This aligns with previous calls from ECB officials advocating for action, as highlighted by ing-think. The desk underscores that this corrective measure aims to bolster the central bank's credibility while preempting indirect effects from energy price shocks.
Key economic indicators suggest resilience in the eurozone economy, driven partly by favorable positioning against Asian competitors affected by geopolitical tensions in the Middle East. Notably, inflation figures remain elevated, with expectations for the headline rate to stay above 3% year-over-year throughout the remainder of the year, indicating a critical juncture for the ECB's decision-making process.
Where it sits in our coverage
The consensus for the EUR/USD pair is currently set at 1.075, with a target range between 1.04 and 1.12. This aligns with targets from notable firms including: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective reinforces the belief in a single upward motion for rates, placing the desk's outlook within the upper tier of strewn forecasts amid ongoing economic resilience.
How other firms see it
There appears to be a general consensus among firms that support a moderate tightening approach, while those opposed, including bofa, express caution regarding excessive hikes due to potential economic backlash. The EUR/USD corridor may reflect not only these projections but also broader shifts in market sentiment surrounding rate expectations.
Key related discussions should include ongoing insights from the Federal Reserve's actions, given their influence on global rates, particularly how these developments affect the EUR/USD currency pair. Investors should remain vigilant on market signals that could indicate shifts in sentiment or adjustments in monetary policy strategies amongst central banks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The ECB is expected to raise rates by 25 basis points next week, reflecting concerns over energy-driven inflation.
- 02Headline inflation in the eurozone is projected to remain above 3% for the remainder of the year.
- 03Economic resilience observed against geopolitical tensions may support the ECB's rate hike decision.
- 04The consensus for the EUR/USD pair sits at 1.075, with variation among firm forecasts.
Market implications
Market participants should focus on the potential movement of the EUR/USD, particularly if the rate hike materializes as anticipated. A significant break above 1.08 could signal further bullish momentum, depending on subsequent economic data.
Risks to this view
Any unexpected economic data revealing a downturn in the eurozone or a slowdown in inflation could lead the ECB to rethink its rate hike strategy, potentially triggering a sell-off in the euro. Furthermore, geopolitical developments impacting energy prices could introduce significant volatility.
Articles ECB preview: How to hike rates without creating more market turmoil Published 09:38 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download We expect the ECB to hike interest rates by 25bp next week. As long as inflation remains mainly energy-driven, hiking rates further beyond next week would not make a lot of sense and could harm the eurozone economy Carsten Brzeski The European Central Bank looks set to hike rates by 25bp next Thursday The stage looks increasingly set for another rate hike at next week's European Central Bank meeting. Not only because some ECB members already advocated for a rate hike at the July meeting, but also because, since then, the eurozone economy has shown an almost unexpected resilience to the war in the Middle East.
This is partly due to good luck and to Asian competitors being hit harder by the closure of the Strait of Hormuz and losing orders to European competitors, but also to long-announced fiscal stimulus. At the same time, headline inflation has continued to edge higher and looks set to stay above 3% year-on-year for the remainder of the year, even if other inflation measures like core and services currently provide no reason to panic. With oil prices remaining elevated and the risk of a fresh gas price shock increasing, it will be hard for most ECB policymakers not to see a clear case for another rate hike.
Even if the ECB doesn’t like the term, the second rate hike this year would also fall into the category of ‘insurance rate hike’, or maybe more to the central bank's liking: a rate hike to strengthen its credibility and to preempt any possible indirect or even second-round effects from the current energy price shock. No clear signals from the new staff projections The new round of staff projections will not bring any significant changes but should remain supportive for the rate hike proponents. Given that the cut-off date for the staff projections is normally some two weeks before the Governing Council meeting, the latest surge in bond yields as well as higher energy prices again will not have played a role in the forecasts.
In fact, until a week ago, the so-called external assumptions were almost at similar levels as in the June forecasts. Against this background, we expect the ECB’s growth and inflation forecasts to be revised upwards slightly, mainly due to earlier statistical upward revisions of first-quarter growth and slightly higher oil prices. Base and carry-over effects could lead to marginally higher growth and inflation forecasts for 2027.
More generally speaking, it will be interesting to see whether the ECB will also present updates of the alternative scenarios from June. While in July it almost looked as if the ECB’s ‘milder’ scenario could materialise, we are now rather somewhere between the ‘base’ and ‘adverse’ scenario. Looking beyond next week Whether the ECB will really go beyond a September rate hike is a completely different story.
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