ECB hawks raise outlook for July rate hike

A senior ECB official raised the prospect of a 0.5 percentage point rate hike in July if inflation continues to climb, the first time such a radical shift has been suggested.

The euro rose 1.1% to $1.0546 against the dollar on Tuesday after comments from Dutch central bank governor Klaas Nott, one of the more hawkish members of the ECB’s rate-setting body, sent euro zone government bonds lower. .

ECB President Christine Lagarde hinted that the bank’s first rate hike in more than a decade is likely to happen at the July Governing Council meeting. But she and many other policymakers stressed they would only act “gradually” — suggesting that any change in interest rates would be in 25-basis-point increments.

Knot’s comments made him the first member of the ECB Governing Council to say it may raise the deposit rate by half a percentage point in July. This would bring interest rates from minus 0.5% to zero in one step.

“Based on current knowledge, I am inclined to raise our policy rate by a quarter of a percentage point – unless new data in the coming months suggest that inflation is expanding or building up further,” he told the Dutch TV show University Tour. “And if that’s the case, bigger growth can’t be ruled out either.”

Knot added: “In this case, the logical next step would be equivalent to [to] half a percent. “Inflation in the euro zone hit 7.5% in April – well above the ECB’s 2% target rate – and price pressures are continuing to build on the back of Russia’s invasion of Ukraine and China’s coronavirus lockdown.

“This is the first time it has challenged the ECB’s commitment to gradually tighten policy,” said Frederik Ducrozet, a strategist at Pictet Wealth Management. “Now this is also a proposal that the pigeons can oppose. I will be watching their reaction closely in the coming days.”

The last time the ECB raised rates was in 2011, a move that was subsequently viewed by many economists as a mistake because it foreshadowed the EU’s debt crisis. This time, many of its officials – especially the southern European “doves” – stressed the importance of prudence, given the risk of a euro zone recession.

Following Knot’s comments, European government bonds fell along with the euro’s gains, with 10-year German bund yields up 0.08 percentage points to 1.02 percent.

Expectations for a rate hike by the European Central Bank also rose, Bloomberg data showed, with money markets suggesting the central bank will raise rates by 1 percentage point this year, up from about 0.93 percentage point the previous day.

The euro has come under intense pressure this year on expectations that the Federal Reserve will tighten monetary policy faster than the European Central Bank and some euro zone policymakers worry that a weaker euro will fuel inflation by raising import prices.

The Fed raised its benchmark policy rate by half a percentage point this month for the first time since 2000, and sent a strong signal that it intends to raise the same amount at its next two meetings.

But other monetary authorities, such as the Bank of England, were more cautious about raising rates by 25 percentage points at a time. Lagarde said last week that the ECB would pursue “incrementalism on the pace of monetary policy adjustment” given growing uncertainty about growth.

Societe Generale macro strategist Kit Juckes said the ECB was unlikely to raise rates by more than 25 percentage points in July, adding: “That doesn’t mean there won’t be anyone in the room concerned about the level of inflation there. Yes. “

A quicker-than-expected rate hike by the European Central Bank will support the euro, said Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics. However, he added: “The outlook for EUR/USD is bearish due to Ukraine. If we get more news about an oil or gas embargo or an acceleration of incursions, that will put disproportionate pressure on the EUR.”

Source link