The ECB’s Governing Council meets today to decide on monetary policy, with the market expecting the central bank to end its net asset purchase program in June to set the stage for a rate increase in July.
Translation: Until that asset purchase program ends, there’s little chance of a rate hike. Last week’s higher-than-expected Eurozone Consumer Price Index (at 8.1%) is also increasing pressure on the ECB to tamp down inflation, fearing that if it doesn’t act now, things can quickly get out of control.
Bigger picture: “The key will be President Christine Lagarde’s press conference and any clues around the likelihood of a 50-basis-point interest rate increase in July instead of 25 bps,” Franklin Templeton’s European trading desk wrote in a note. The ECB’s policy rate is currently at -0.5% and analysts are pricing in almost 1.25% of rate hikes by the end of the year. That would be a big U-turn for Europe, which has been mired in eight years of negative interest rates.
Recall that as recently as January 2022, Lagarde wasn’t mentioning the potential for rate increases and was defending the ECB’s slow pace in removing accommodation compared to the rapid hiking cycle of the U.S. Federal Reserve. Today’s projections are also likely to show that inflation won’t drop below the ECB’s 2% target through 2024, making officials even more nervous about tackling price pressures. The central bank was hesitant to remove stimulus as it assessed the fallout from the war in Ukraine, but it may no longer have a choice to avert further damage to the bloc’s economy.
On watch: Investors will also be paying close attention to European bonds for repercussions from the winding down of the asset purchase program. The ECB has already purchased €4.9T of bonds, more than half the €8.8T of the assets that now sit on its balance sheet. In looking at industry sectors, higher bond yields and avoiding a recession should help banks, according to eToro strategist Ben Laidler, while a restrained hiking cycle that still supports financial conditions would help indebted industries like utilities.
