In its so-called repo rate path from 9 June, the Executive Board of the ECB has outlined an increase of 25 basis points, which is also the average forecast among analysts prior to the announcement. However, in the market pricing, the probability of a double increase from the ECB is almost 40 percent, reports the news agency Bloomberg.
According to Bloomberg’s sources, the issue of a double increase will also be discussed in the Executive Board before the decision.
Fed increases pressure
Speculation about the interest rate hike has picked up since inflation in the eurozone was measured at a record high of 8.6 per cent, which is more than four times higher than the ECB’s inflation target of 2 per cent. And as recently as 28 June, ECB Governor Christine Lagarde opened in a speech to move harder than planned.
The pressure on the ECB to raise interest rates is also gaining momentum from the fact that ahead of the next interest rate announcement from the US Federal Reserve (Fed) next week, discussions have begun on whether it is not time for an increase of as much as 100 basis points.
Despite speculation, Danske Bank’s global head of research, Heidi Schauman, believes that the ECB is content with a 25-point increase. Among other things, she refers to an increased risk of so-called stagflation – a nightmare scenario for central banks where growth slows down while inflation remains at a high level.
According to Schauman, the ECB must raise firmly, as inflation is currently more important to overcome than to take into account uncertain growth prospects.
“The ECB will go ahead with raising all three policy rates by 25 basis points,” Schauman wrote in an email to TT.
“Larger increase in September”
The major banks SEB’s and Nordea’s economists are on the same track.
“We expect the ECB to raise the key interest rate by 25 basis points and indicate the possibility of a larger increase in September,” the SEB economists write in an analysis.
Nordea’s formulations prior to the announcement are similar.
“Although some hawks want to leave the door open for a major rate hike and recent media reports suggest that the ECB will also consider a major adjustment this week, we believe the ECB will still follow its previous guidance and raise interest rates by 25 basis points on Thursday,” he wrote. Nordea’s chief analyst Jan von Gerich in an analysis prior to the announcement.
Important for trust
The ECB is also expected to clarify how to counter the so-called fragmentation of the eurozone fixed income market, a problem highlighted by rising Italian interest rates as a result of uncertainty over Prime Minister Mario Draghi’s future. Specifically, it is assumed to land in some form of support purchase tool, which will even out interest rate differentials in the eurozone.
“This is important for the markets’ confidence in the ECB to remain strong and for Italian interest rates not to rise sharply again. We expect the new instrument to be implemented in a flexible way, with a focus on shorter maturities, but without a predetermined intervention amount or time frame “, writes Danske Bank’s Schauman in a comment.