The European Central Bank will hike interest rates for the first time in 11 years on Thursday. At the June meeting, the organization warned against raising the price of money by 25 basis points, but the development of the eurozone economy and most importantly High inflation has turned the 0.5% rise into a rumor that the market is already pricing in.
In fact, Reuters reported on Tuesday, citing two sources “with direct knowledge of the debate” that members of the Governing Council will debate during the two-day meeting whether the next hike will be 25 or 50 basis points. The 0.5% increase would be the third of 50 basis points or more made by the body. The first took place on January 22, 1999 at its third meeting, when it suddenly raised interest rates by 125 basis points to 4.5% in the first month of the introduction of the euro on the financial markets, and the second on June 9, 2000, when the ECB hiked interest rates by 50 basis points to 5.25%.
On this occasion, the deposit rate will increase from -0.5% to 0%. The cash price is at an all-time low. The theory that money prices will rise more than announced comes as euro-zone inflation hit 8.6% in June, a year-to-date high. In addition, core inflation, which excludes energy and fresh food, came in at 3.7%, down from May.
With this rumor of a more aggressive rate hike, the Ibex 35 banks are up sharply, with gains of between 4% and 7%, catapulting the index above 8,000 points, which it lost over the past week with a 2% gain. So was the euro, which appreciated almost 1% against the dollar, moving away from the parity it reached a week ago, now trading at 1.0239 greenbacks.
Gergely Majoros, a member of Carmignac’s investment committee, believes the ECB is “stuck between a rock and a hard place”. For Majoros, the European supervisor’s job will be to navigate between a situation of high inflation and the growing clouds over gas supplies from Russia. That’s why he points it out The ECB must view its normalization work “in a potentially recessionary environment”..
All in all, Majoros believes Thursday’s meeting should be “a unique and historic moment” and believes a 50 basis point rate hike after 11 years is “too high”, although “the fundamental situation would justify an exit from the bank”. Negative interest rate environment as soon as possible”.
François Rimeu, senior strategist at La Française AM, believes the general tone will remain “very aggressive” given the latest inflation figures and downward pressure on the euro exchange rate. They expect that too ECB President Christine Lagarde reiterated that the pace of monetary tightening will be determined by optionality, data dependency, incremental character and flexibility. She will confirm that ECB interest rates will rise again in September and that the size of this hike will depend on the medium-term inflation outlook.
Keep an eye on the anti-fragmentation tool
Despite these rumors of a possible more aggressive rise, the market and analysts will be keeping a close eye on the news they are announcing about the anti-fragmentation tool. now called Transmission Protection Mechanism (TPM). Peter Goves, Fixed Income Analyst at MFS Investment Management, explains that a definitive tool may not yet be operational, “but ECB President Christine Lagarde will most likely provide some details on how it works and its applicability”.
François Rimeu explains that this plan is “unlimited, with light conditions and 100% sterilized”. The main risk would be that the ECB does not meet market expectations for the new plan. “The central bank has a difficult communication exercise, especially given the new political uncertainty in Italy,” says Rimeu.
Vincent Chaigneau, Head of Research at Generali Investments, says the ECB’s job of supporting fragmentation is now much more difficult, although he points out that the ECB has a good track record of tackling financial fragmentation, but in a very difficult environment. different. “We fear that the flexibility around reinvesting the PEPP – say around €20 billion per month – will not be enough in the event of a serious market testeven if the ECB agrees to some frontloading (reinvesting before the selected issues mature), which does not appear to be part of the initial adjustment,” says Chaigneau.
Germán García Mellado, Pension Manager at A&G, assures that the most important part of the meeting will be the new Anti-Fragmentation Mechanism (TPM). “Although it has not been confirmed that it will be ready by Thursday’s meeting, there are many expectations in the market regarding the ability of this tool to contain the risk premia of southern eurozone countries,” says García Mellado. Most investors expect an unlimited purchase volume with soft conditions, “So there is a lot of room to disappoint these expectations, given the history of the ECB, in which it initially took far-reaching measures,” he stresses.
The manager adds that details on the sterilization of purchases of recipient country bonds will also be relevant, “although it appears that this will not be done via the sale of core bonds, but via the interbank liquidity system”.