OPINION
Market Rating Before FOMC MeetingJan 31
Interest Rate Hike Expected From ECB After 11 Years
The supply bottlenecks caused by the pandemic and the Russia-Ukraine war created fluctuations in the energy and agricultural commodity markets. After the consumer price index in the Euro Zone reached historical highs, the ECB is expected to join the global policy tightening cycle.
Contrary to the ECB, which argues that the inflationary pressures from the pandemic are temporary and hesitates to end monetary stimulus to assess the effects of the war in Ukraine, global central banks, led by the US Federal Reserve (FED), have turned to the path of aggressive tightening.
However, at this point, the consumer price index (CPI) in the Euro Zone, as reported by the European Statistical Office (Eurostat), increased by 0.8 percent in May compared to the previous month and broke a record with 8.1 percent on an annual basis. In this period, the annual core CPI increased to 3.8 percent, while the producer price index (PPI) at 37.2 percent in the previous month indicated that inflation risks would continue to be up in the near term.
In the June meeting of the ECB, which will be completed tomorrow, it is expected to announce that net asset purchases under the APP will end in July and point to an interest rate hike. The bank's current refinancing operation interest rate is 0.0 percent, the deposit interest rate is minus 0.50 percent, and the marginal funding interest rate is 0.25 percent. However, the bank last increased interest rates in April 2011.
ECB President Christine Lagarde, who will subsequently appear in front of the press, is expected to give the clearest signal about the economic projections of the bank, the magnitude of the monetary tightening, which is expected to start in July, and its continuity until the end of the year. Expectations that the ECB will raise interest rates by 75 basis points by September are already priced in the markets. The absence of any sign of further tightening could trigger profit realizations in the euro.
