ECB unanimous in decision to interest rate hike
2023.02.03 11:26
ECB unanimous in decision to interest rate hike
By Ray Johnson
Budrigannews.com – Six of the European Central Bank’s policymakers stated that ECB policymakers largely agree on how much more is required to tame inflation. However, investors hoping for an early end to rate hikes were not persuaded by the stern rhetoric on Thursday from the ECB.
Since July, the eurozone’s 20 central banks have raised interest rates by a total of 3 percentage points, the most in their history. On Thursday, they said they would make another big move in March.
Markets, however, reduced their bets on additional overnight rate hikes, interpreting the central bank’s lack of guidance as evidence of a waning commitment to inflation control.
In the United States, markets are pricing in rate cuts this year despite Federal Reserve Chair Jerome Powell saying he does not see this happening. This is a similar disconnect.
However, on- and off-record conversations with half a dozen policymakers suggest that the 26 members of the ECB’s Governing Council are more in agreement than the markets believe on the need for additional rate increases, and that differences on the final destination are mostly minor.
After reaching 3% in March, there appears to be little or no disagreement that rates will rise once more in May, bringing the deposit rate to at least 3.25% and possibly 3.5%. Public support for such a move came from the governors of Belgium, Slovakia, and Lithuania’s central banks, while others privately supported it.
Gediminas imkus, the president of Lithuania, stated:
“The March rate hike is not the last one.” In May, it could be 25 or 50 basis points, but not nearly 75.”
It would appear that there is little desire to go much further than that at this time.
On condition of anonymity, a number of hawkish policymakers stated that they were content with the 3.5% peak rate that financial markets had priced in prior to Thursday’s meeting.
Given that the deposit rate was minus 0.5% when the ECB began hiking, a move to 3.5% would represent a rapid shift of 400 basis points, this would put the gap between policy hawks and doves at just 25 basis points.
The caveat is that excluding volatile energy and food prices, sticky underlying inflation could alter perceptions and raise expectations for rate hikes.
Belgian central bank chief Pierre Wunsch said, “If core remains persistent, if we keep seeing core momentum being close to 5%, for me a terminal rate of 3.5% would be a minimum.” He said that rate moves to 4% or higher in the United States and Britain could be used as a benchmark by the ECB.
“We have more ground to cover and we are not done,” ECB President Christine Lagarde said on Thursday, citing high core inflation. Despite the fact that overall inflation is rapidly falling as a result of falling energy prices and base effects, underlying inflation has been hovering above 5% in recent months.
Conservative policymakers appear to have a clear numerical advantage should the need arise.
According to sources, the majority of swing voters now consider doing too little to be riskier than doing too much, and they have sided with the hawkish camp, as evidenced by the clear majority for Thursday’s actions and the ease with which they were agreed upon.
Economists and investors have also focused on a deposit rate peak of between 3.25 and 3.5 percent. This suggests that the rate will only move one or two times after the hike in March and will end by the middle of the year.
Reinhard Cluse, an economist at UBS, stated:
“In the grand scheme of things, we can be relatively confident about a terminal rate of 3.25%-3.50%.”
He stated that the U.S. economy is shrinking, so the Federal Reserve may be getting there before the Bank of England has stopped raising rates by June.
Cluse went on to say:
“We will have external weakness creeping into the European economy, so we will be at a point where the ECB can say ‘we have done enough’.”
Deutsche Bank economists (ETR:), OTC: BNP Paribas, NYSE: Morgan Stanley, JPMorgan Chase & Co. Goldman Sachs (NYSE:) sees the terminal rate at 3.25 percent. Societe Generale (OTC:) and Asset Management anticipate it at 3.5 percent. at 3.75%.
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