The countdown to the first rate hike by the European Central Bank in more than ten years has begun. The decision on the increase, which has been announced since June, will be taken at the ECB meeting on July 21.
Although the intention to raise interest rates by a quarter of a percentage point (25 basis points) was expressed at the previous meeting, a larger increase cannot be ruled out as some members of the ECB’s 25-member Governing Council are pushing for a half percentage point increase to be considered unit, due to persistently rising inflation. ECB President Christine Lagarde has until recently backed a 25bp hike, but at the central bank’s conference last week in Sintra, Portugal, she said the ECB would move faster if inflation did not ease.
Data released by Eurostat on Friday showed that the harmonized index of consumer prices in the Eurozone rose in June to 8.6% from 8.1% in May, a development that will be taken into account and factored into the path of interest rate increases more generally. At the same time, it will also be taken into account that the so-called core inflation – which does not include energy and food prices – decreased marginally to 3.7% from 3.8% in May.
A change in rate hike that has been announced would not be unprecedented. Last month, the US central bank (Fed) raised its key interest rate by three-quarters of a percentage point (75bp), having previously announced a half-percentage point move as US inflation rose to 8.6 in May. %. The larger than expected Fed rate hike will also be taken into account by the ECB as it directly affects the euro, which has weakened a lot and this in turn increases imported inflation in the Eurozone. The euro has fallen 9% since the start of the year against the dollar, trading between $1.04 and $1.05. At the same time, the slide of the euro against the Swiss franc widened after the Swiss central bank unexpectedly increased interest rates by half a percentage point.
If the increase finally decided by the ECB will be in the order of 25 bps, the interest rate for accepting deposits from the ECB will still remain in negative territory, specifically at -0.25%, while the main refinancing rate will be at 0.25% and the marginal lending rate at 0.50%. The increase in the deposit acceptance rate will lead to a corresponding increase in the Euribor, which is usually linked to the installment of floating loans in euros. Today, the Euribor for one month is moving around -0.5% and for three months around -0.2%.
The meeting on July 21 will also be interesting in terms of the direction the ECB will give for the next interest rate hikes. In June, the ECB had forecast another rate hike in September, depending on the medium-term outlook for inflation, i.e. the forecast for where it will move in 2024. “If the medium-term outlook for inflation remains unchanged or deteriorates, a higher an increase would be appropriate at the September meeting,” the ECB said in a statement on June 9, signaling that a half-percentage-point rate hike is likely if July and August inflation data show no improvement.
The ECB had announced other interest rate hikes after September, which will again be decided with the main criterion being the course of inflation. For many analysts, the ECB’s key refinancing rate will rise to at least 1.5% to 2%, depending on how the economy is doing. With the fight against inflation a clear objective for the ECB, the slowdown in the Eurozone economy, which continues according to recent survey data, is no longer as important as it was some time ago. Lagarde said the ECB would do whatever it takes to reduce inflation, with the ECB’s chief economist, Philip Lane, noting, however, that the ECB should also weigh developments on the growth front. Fed Chairman Jerome Powell was clearer in his speech in Sindra, stressing that he will continue to raise interest rates even if there is a risk that the US economy will enter a recession.
Along with interest rate hikes, the ECB is seeking to protect southern Eurozone countries from a large rise in their bond yields. The plan he announced after the emergency meeting on June 15 appears to have worked in principle as yields and spreads (the difference in yields relative to German bonds) have fallen. The ECB’s plan envisages as a first line of defense the bond markets of the South with the money from the repayment of the bonds of the core countries – Germany, France and the Netherlands – that are expiring. It also provides for a new instrument to buy bonds, in case reinvestments are not enough to calm the markets. The yield on the 10-year bonds of the Greek government was formed on Friday at noon at 3.53% and was 10 bp. lower than the performance a month ago, with the spread over German bonds narrowing to 2.2 percentage points.