OPINION
Market Rating Before FOMC MeetingJan 31
European Central Bank Prepares for a Second Jumbo Rate Hike
The decision of the European Central Bank (ECB) on the October monetary policy meeting will be announced tomorrow. Markets expect the bank to raise rates by another 75 basis points at the critical meeting.
As it will be remembered, the ECB, against the high inflationary climate, increased interest rates by 75 basis points for the first time since its establishment on June 1, 1998, at its previous meeting on 7-8 September, while it had reduced the refinancing operation interest rate to 1.25%, the deposit interest rate to 0.75% and the marginal funding rate to 1.50%.
At its September meeting, the bank announced that inflation would remain high for a long time and that they were aiming to raise interest rates further oo lower inflation expectations and counter the risks of upward slides. In addition, at the meeting, the bank revised its inflation forecasts upwards to 8.1% for 2022, 5.5% for 2023, and 2.3% for 2024.
However, inflation has continued to rise in Europe since the September meeting. According to the data reported by the European Statistical Office (Eurostat), the consumer price index (CPI) in the eurozone broke a record with 9.9% on an annual basis in September. The data was 9.1% in August and 8.9% in July. It should be noted that the biggest contributor to consumer inflation rates is energy and food products due to the Russia-Ukraine war. In addition, it should be reminded that the producer price index (PPI) broke a record by exceeding the market expectations of 43.1% in this period at 43.3%. This shows that the transitivity to consumer prices has not come to an end yet.
On the other hand, the risks of recession in the eurozone also remain. PMI data, one of the leading indicators of growth, was announced at the beginning of the week. According to the data reported by London-based global information provider IHS Markit and S&P Global, the composite purchasing managers index (PMI) fell to 47.1 points in October, below market expectations, indicating that economic activity in the region continues to decline and recession risks increase.
On the other hand, the US Federal Reserve (FED) continues its aggressive tightening steps. It is considered almost certain that FED, which has been increasing interest rates by 75 basis points three times in a row, will tighten another 75 basis points at its meeting to be held next week. This puts the euro under pressure against the dollar.
At this point, the dollar's outlook forces the ECB to make a jumbo interest rate hike in order not to import inflation and to prevent the weak euro from generating more inflation. It should be added that the ECB Board Members have maintained their hawkish stance in recent days.
Here, it is clear that the ECB is stuck between the recession-inflation shear. The bank is unlikely to go for a flash increase of 100 basis points for the recession not to become more dramatic. However, a tightening of 75 basis points is very important in the context of the fight against inflation. In addition, the signals of how far the ECB can cope with the risks of recession here will be the most important communication topic of tomorrow's meeting. Especially after the meeting, the statements of ECB President Christine Lagarde are of critical importance.
It should be noted that the bank's preference for a second rate hike of 75 basis points could keep the euro above the psychological 1.0000 level. However, it may intensify the weight of the DAX40 index, which is the leading indicator of the region.
As it will be remembered, the ECB, against the high inflationary climate, increased interest rates by 75 basis points for the first time since its establishment on June 1, 1998, at its previous meeting on 7-8 September, while it had reduced the refinancing operation interest rate to 1.25%, the deposit interest rate to 0.75% and the marginal funding rate to 1.50%.
At its September meeting, the bank announced that inflation would remain high for a long time and that they were aiming to raise interest rates further oo lower inflation expectations and counter the risks of upward slides. In addition, at the meeting, the bank revised its inflation forecasts upwards to 8.1% for 2022, 5.5% for 2023, and 2.3% for 2024.
However, inflation has continued to rise in Europe since the September meeting. According to the data reported by the European Statistical Office (Eurostat), the consumer price index (CPI) in the eurozone broke a record with 9.9% on an annual basis in September. The data was 9.1% in August and 8.9% in July. It should be noted that the biggest contributor to consumer inflation rates is energy and food products due to the Russia-Ukraine war. In addition, it should be reminded that the producer price index (PPI) broke a record by exceeding the market expectations of 43.1% in this period at 43.3%. This shows that the transitivity to consumer prices has not come to an end yet.
On the other hand, the risks of recession in the eurozone also remain. PMI data, one of the leading indicators of growth, was announced at the beginning of the week. According to the data reported by London-based global information provider IHS Markit and S&P Global, the composite purchasing managers index (PMI) fell to 47.1 points in October, below market expectations, indicating that economic activity in the region continues to decline and recession risks increase.
On the other hand, the US Federal Reserve (FED) continues its aggressive tightening steps. It is considered almost certain that FED, which has been increasing interest rates by 75 basis points three times in a row, will tighten another 75 basis points at its meeting to be held next week. This puts the euro under pressure against the dollar.
At this point, the dollar's outlook forces the ECB to make a jumbo interest rate hike in order not to import inflation and to prevent the weak euro from generating more inflation. It should be added that the ECB Board Members have maintained their hawkish stance in recent days.
Here, it is clear that the ECB is stuck between the recession-inflation shear. The bank is unlikely to go for a flash increase of 100 basis points for the recession not to become more dramatic. However, a tightening of 75 basis points is very important in the context of the fight against inflation. In addition, the signals of how far the ECB can cope with the risks of recession here will be the most important communication topic of tomorrow's meeting. Especially after the meeting, the statements of ECB President Christine Lagarde are of critical importance.
It should be noted that the bank's preference for a second rate hike of 75 basis points could keep the euro above the psychological 1.0000 level. However, it may intensify the weight of the DAX40 index, which is the leading indicator of the region.
