OPINION
Market Rating Before FOMC MeetingJan 31
The European Central Bank is Highly Likely to Raise Interest Rates After 11 Years
While price pressures have reached a record high in the Euro Area, markets are focused on a rate hike, which will be the first since April 2011.
The ECB, which will announce its monetary policy decision at 14:15 (GMT+2) tomorrow, is expected to increase interest rates by 25 basis points after an 11-year break. The ECB currently has an interest rate on the main refinancing operations (MRO) at 0.0 percent, rate on deposits at minus 0.50 percent and marginal lending facility at 0.25 percent.
According to data released by Eurostat yesterday, the consumer price index (CPI) in the Euro Area increased by 0.8 percent in June compared to the previous month, reaching an all-time high of 8.6 percent year-over-year. According to Eurostat, the largest contribution to annual inflation came from energy at a rate of 42.0 percent and food at a level of 8.9 percent.
At this point, inflation expectations for Europe economies also continue to rise. The benchmark German 10-year bond interest rate is trading at around 1.28 percent, a slight retreat from the 8-year peak it saw on June 21, which was 1.79 percent. Italian 10-year treasuries are priced at 3.42 percent and French 10-year treasuries are priced at 1.85 percent. This suggests that the difference between the ECB's interest rate and bond market pricing is nearing its peak.
In its June meeting, the ECB pointed out that energy and agricultural commodity prices, which increased due to the effects of the Russia-Ukraine war, were the main determinants of the recent rise in inflation and that price pressures spread throughout.
Indicating that inflation is a big challenge, the ECB stated that they plan to increase interest rates by 25 basis points at its monetary policy meeting in July and that this step can be increased in September if the inflation outlook worsens. However, as a result of the high tensions on the West –Russia line due to the invasion of Ukraine, there is a possibility that Russian gas to Europe will be completely cut off. While this creates recession risks for Europe, there is a possibility that the ECB will subdue economic activity with a very aggressive rate hike.
Considering all these, as supply-side factors in inflation will be outside of the monetary policy influence and in order to avoid recession risks through the domestic demand channel, ECB is likely to increase rates by 25 basis point to control inflation and inflation expectations. In markets where expectations that the ECB will be involved in the global tightening cycle are fully priced in, if the ECB raises rates only by 25 basis points or less, we may observe profit sales following the recovery in euro.
The ECB, which will announce its monetary policy decision at 14:15 (GMT+2) tomorrow, is expected to increase interest rates by 25 basis points after an 11-year break. The ECB currently has an interest rate on the main refinancing operations (MRO) at 0.0 percent, rate on deposits at minus 0.50 percent and marginal lending facility at 0.25 percent.
According to data released by Eurostat yesterday, the consumer price index (CPI) in the Euro Area increased by 0.8 percent in June compared to the previous month, reaching an all-time high of 8.6 percent year-over-year. According to Eurostat, the largest contribution to annual inflation came from energy at a rate of 42.0 percent and food at a level of 8.9 percent.
At this point, inflation expectations for Europe economies also continue to rise. The benchmark German 10-year bond interest rate is trading at around 1.28 percent, a slight retreat from the 8-year peak it saw on June 21, which was 1.79 percent. Italian 10-year treasuries are priced at 3.42 percent and French 10-year treasuries are priced at 1.85 percent. This suggests that the difference between the ECB's interest rate and bond market pricing is nearing its peak.
In its June meeting, the ECB pointed out that energy and agricultural commodity prices, which increased due to the effects of the Russia-Ukraine war, were the main determinants of the recent rise in inflation and that price pressures spread throughout.
Indicating that inflation is a big challenge, the ECB stated that they plan to increase interest rates by 25 basis points at its monetary policy meeting in July and that this step can be increased in September if the inflation outlook worsens. However, as a result of the high tensions on the West –Russia line due to the invasion of Ukraine, there is a possibility that Russian gas to Europe will be completely cut off. While this creates recession risks for Europe, there is a possibility that the ECB will subdue economic activity with a very aggressive rate hike.
Considering all these, as supply-side factors in inflation will be outside of the monetary policy influence and in order to avoid recession risks through the domestic demand channel, ECB is likely to increase rates by 25 basis point to control inflation and inflation expectations. In markets where expectations that the ECB will be involved in the global tightening cycle are fully priced in, if the ECB raises rates only by 25 basis points or less, we may observe profit sales following the recovery in euro.
