OPINION
Market Rating Before FOMC MeetingJan 31
The European Central Bank is to Change the Game tomorrow
Central banks, which are directing global markets, have been struggling with high inflation rates recently. Especially the high energy and food prices caused by the war between Russia and Ukraine remain decisively high on these rates. As a result of these developments, inflation rates in Euro Area are at an all-time high of 7.5 percent, and decision text which will be released following the conclusion of the European Central Bank (ECB) meeting tomorrow at 13.45 (GMT+2) will be critical.
The Most Recent Meeting
Interest rates were kept constant in line with market expectations at the ECB's Monetary Policy meeting held on March 9-10, while the Pandemic Emergency Purchase Program (PEPP) was terminated. Governing Council today revised the purchase schedule for its APP for the coming months. Monthly net purchases under the APP will amount to €40 billion in April, €30 billion in May and €20 billion in June. It was added to the statements that the calibration of net purchases for the third quarter is based on data.
In addition, Governing Council stood ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term. Accordingly, Governing Council would assess the appropriate calibration of its two-tier system for reserve remuneration so that the negative interest rate policy does not limit banks’ intermediation capacity in an environment of ample excess liquidity.
President Lagarde’s Remarks
ECB President Christina Lagarde said that the war in the region will have a significant impact on economic activity and inflation rates, while she quoted that it depends on the course of the war on how long these effects will continue. In the shadow of these statements, Lagarde, who reported that the average inflation rate excluding food and energy will be 2.6 percent in 2022, noted that long-term inflation expectations have fluctuated at the target level. Lagarde further noted that inflation may be significantly higher in the short term.
Hawkish Highlights in the Policy Accounts
In the minutes of the ECB's March meeting published last week, we found that members have a hawkish impression. In addition, it was stated that inflation rates are expected to remain above the target in 2023 with the recent developments, while it was claimed that rates will remain above the currently targeted levels in 2024.
In addition, some ECB members argued that the pace of previously agreed net purchases is not proportional, while many ECB members noted in the text of the minutes that they urgently want additional steps to normalize the situation. On the other hand, some Committee members requested a definite end date for non-PEPP purchases in the summer, while pointing out that an interest rate increase may come with the third quarter of the year if these purchases are terminated in the summer.
The ECB, which has maintained its policy in the current conjuncture since the period before pandemic, first terminated its purchases of PEPP in order to combat recently rising inflation rates. The ECB, which terminated these purchases at its meeting last month, turned to non-PEPP purchases in the new period. However, this was criticized by the Committee members. For this purpose, some of the members recommended that net asset purchases will be completed in the summer. In the shadow of these developments, the impressions of ECB members at the meeting to be held tomorrow will be decisive for Euro Area inflation. Here, if members can accelerate the contraction of purchases, it can be considered that the first months of the third quarter of the year may be an appropriate time for interest rate to be increased.
The Most Recent Meeting
Interest rates were kept constant in line with market expectations at the ECB's Monetary Policy meeting held on March 9-10, while the Pandemic Emergency Purchase Program (PEPP) was terminated. Governing Council today revised the purchase schedule for its APP for the coming months. Monthly net purchases under the APP will amount to €40 billion in April, €30 billion in May and €20 billion in June. It was added to the statements that the calibration of net purchases for the third quarter is based on data.
In addition, Governing Council stood ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term. Accordingly, Governing Council would assess the appropriate calibration of its two-tier system for reserve remuneration so that the negative interest rate policy does not limit banks’ intermediation capacity in an environment of ample excess liquidity.
President Lagarde’s Remarks
ECB President Christina Lagarde said that the war in the region will have a significant impact on economic activity and inflation rates, while she quoted that it depends on the course of the war on how long these effects will continue. In the shadow of these statements, Lagarde, who reported that the average inflation rate excluding food and energy will be 2.6 percent in 2022, noted that long-term inflation expectations have fluctuated at the target level. Lagarde further noted that inflation may be significantly higher in the short term.
Hawkish Highlights in the Policy Accounts
In the minutes of the ECB's March meeting published last week, we found that members have a hawkish impression. In addition, it was stated that inflation rates are expected to remain above the target in 2023 with the recent developments, while it was claimed that rates will remain above the currently targeted levels in 2024.
In addition, some ECB members argued that the pace of previously agreed net purchases is not proportional, while many ECB members noted in the text of the minutes that they urgently want additional steps to normalize the situation. On the other hand, some Committee members requested a definite end date for non-PEPP purchases in the summer, while pointing out that an interest rate increase may come with the third quarter of the year if these purchases are terminated in the summer.
The ECB, which has maintained its policy in the current conjuncture since the period before pandemic, first terminated its purchases of PEPP in order to combat recently rising inflation rates. The ECB, which terminated these purchases at its meeting last month, turned to non-PEPP purchases in the new period. However, this was criticized by the Committee members. For this purpose, some of the members recommended that net asset purchases will be completed in the summer. In the shadow of these developments, the impressions of ECB members at the meeting to be held tomorrow will be decisive for Euro Area inflation. Here, if members can accelerate the contraction of purchases, it can be considered that the first months of the third quarter of the year may be an appropriate time for interest rate to be increased.
