The fallout from last week’s hike in interest rates from the European Central Bank began to roll out across the continent this week.
Last Thursday, the ECB announced that it was increasing its key interest rate by 0.25 percentage points to 4.25%, a move that came into effect yesterday. In a statement accompanying the news, the ECB said that its Governing Council wanted to ensure that ‘inflation returns to its 2% medium-term target in a timely manner’.
As Expert Investor wrote last week, the real focus right now around the markets is what course the ECB will take in September when it next reviews the base rate.
A note from Francesco Pesole, Benjamin Schroeder, and Carsten Brzeski (an old friend of Expert Investor) of ING recently appeared on the bank’s site.
The three wrote: “A 25bp hike is a done deal. More relevant is what the European Central Bank will signal as its next steps. Given the surprisingly dovish remarks by some of its most hawkish members, a renewed commitment to future hikes – as we have seen in past meetings – seems unlikely. Switching to greater data dependency for the meeting ahead will be viewed as mildly dovish and could see markets nudge down hike expectations, which are close to fully discounting a further 25bp hike before the end of the year.”
They added: “The ECB will be aware of that dilemma, and the risk is that it will seek to influence rate expectations further out, thereby manufacturing a (bearish) steepening of the front end. Currently, markets see the ECB cutting rates by around 75bp over the course of 2024. The challenge will be to overcome indications of a further softening macro backdrop as conveyed by today’s flash PMIs.”
According to the ECB’s own statistics, the central bank maintained steady rates between zero and -0.50% from July 2012 to September 2019. In that time, it adjusted the base rate seven times. In contrast, it has now adjusted the same rate upwards nine times in the past year.
Now, a day after the latest hike was put in place, it has been reported that the UK’s Bank of England is expected to follow suit with a similar rise today, possibly bringing its rate to 5.25%.
