OPINION
Market Rating Before FOMC MeetingJan 31
European Central Bank to Assess 75-Base Points Tightening
In the shade of recession concerns in the Eurozone and record-breaking consumer inflation, eyes are turned to the European Central Bank's (ECB) critical monetary policy meeting, which will be held tomorrow, on September 7-8. At the meeting, the markets expect an interest rate increase of 75 basis points from the bank.
In response to the market’s expectations for a 25 basis point increase in interest rates at the July meeting we left behind, the bank went into 50 basis points front-loaded tightening after 11 years, reducing the refinancing operation interest rate to 0.50 percent, the deposit interest rate to 0.00 percent and the marginal funding interest rate to 0.75 percent. However, pointing out that further normalization of interest rates at forthcoming meetings would be appropriate, the ECB announced a new bond purchase program (TPI) to support the effective transmission of monetary policy.
In Europe, however, inflation continued to climb. As the European Statistical Office (Eurostat) stated, the consumer price index in the Eurozone rose by 0.5 percent in August compared to the previous month, renewing the record at 9.1 per annum. According to Eurostat, the biggest contribution to annual inflation came from energy with 38.3 percent, pinnacle by food, alcohol, and tobacco products with 10.6 percent. In this period, the producer price index (PPI) increased to 37.9 percent on an annual basis, pointing to the continuation of price pressures.
At this point, the ongoing energy crisis in Europe since the Russia-Ukraine war is a major problem. A new record in energy prices was seen recently when the Russian energy company Gazprom announced that the flow of natural gas to Europe was cut off for an indefinite period through the North Stream pipeline. On the Dutch stock exchange, natural gas contracts with October maturities climbed up to 340 euros. This situation signals additional price pressures.
On the other hand, recession concerns remain in the Eurozone. According to data released by IHS Markit and S&P Global, economic activity continues to decline and recession risks remain alive as the index of compound purchasing managers (PMI) drops from 49.9 points to 48.9 points in August.
Between the pinnacle of inflation and the recession dilemma, the ECB is clearly at a difficult juncture. Recently, however, the bank's leading officials' hawkish statements suggest that recession risks can be somewhat ignored and that a 75 basis-point aggressive tightening is more likely, with members appearing to be focused on lowering inflation.
Under this outlook, a 75 basis point increase in interest rates at the bank's critical meeting tomorrow could rebound the euro, which has dropped to the lowest level of 20 years against the dollar, to some extent. However, in addition to the recession concerns, an interest rate hike by the ECB on this scale may also increase the pressure on the DAX40 index, which is the leading indicator.
In response to the market’s expectations for a 25 basis point increase in interest rates at the July meeting we left behind, the bank went into 50 basis points front-loaded tightening after 11 years, reducing the refinancing operation interest rate to 0.50 percent, the deposit interest rate to 0.00 percent and the marginal funding interest rate to 0.75 percent. However, pointing out that further normalization of interest rates at forthcoming meetings would be appropriate, the ECB announced a new bond purchase program (TPI) to support the effective transmission of monetary policy.
In Europe, however, inflation continued to climb. As the European Statistical Office (Eurostat) stated, the consumer price index in the Eurozone rose by 0.5 percent in August compared to the previous month, renewing the record at 9.1 per annum. According to Eurostat, the biggest contribution to annual inflation came from energy with 38.3 percent, pinnacle by food, alcohol, and tobacco products with 10.6 percent. In this period, the producer price index (PPI) increased to 37.9 percent on an annual basis, pointing to the continuation of price pressures.
At this point, the ongoing energy crisis in Europe since the Russia-Ukraine war is a major problem. A new record in energy prices was seen recently when the Russian energy company Gazprom announced that the flow of natural gas to Europe was cut off for an indefinite period through the North Stream pipeline. On the Dutch stock exchange, natural gas contracts with October maturities climbed up to 340 euros. This situation signals additional price pressures.
On the other hand, recession concerns remain in the Eurozone. According to data released by IHS Markit and S&P Global, economic activity continues to decline and recession risks remain alive as the index of compound purchasing managers (PMI) drops from 49.9 points to 48.9 points in August.
Between the pinnacle of inflation and the recession dilemma, the ECB is clearly at a difficult juncture. Recently, however, the bank's leading officials' hawkish statements suggest that recession risks can be somewhat ignored and that a 75 basis-point aggressive tightening is more likely, with members appearing to be focused on lowering inflation.
Under this outlook, a 75 basis point increase in interest rates at the bank's critical meeting tomorrow could rebound the euro, which has dropped to the lowest level of 20 years against the dollar, to some extent. However, in addition to the recession concerns, an interest rate hike by the ECB on this scale may also increase the pressure on the DAX40 index, which is the leading indicator.
