Test day for the stock market and for the European Central Bank, which may be playing its credibility during this back-to-school monetary policy meeting. For the first time in its history, the Frankfurt institution is preparing to bang its fist on the table and raise its key rates by 75 basis points, which would bring its main indicator, the “refi” or refinancing rate , at 1.25%, after rising 50 basis points in July.
In other times, the Stock Exchange would have taken fright and would undoubtedly have reacted badly. But time is running out, because inflation continues to soar in the countries of the euro zone. At 9.1% over one year in August, it still appreciated by 0.3 points over one month, even exceeding the fears of the consensus to see it climb to 9%. The rise in prices should even reach, or even exceed, 10% in view of the prices of electricity and gas which are reaching record levels, but also of food. Month after month, they degrade corporate margins and household purchasing power.
For Jack Allen-Reynolds of Capital Economics, “ the ECB is expected to raise rates by 1% this week. But the decision would likely be too much for many policymakers to bear, so we expect them to pick up the pace of tightening with a 75 basis point hike. But it will come at the price of further tightening of the screws on a larger scale than usual at the October and December meetings, even if the economy falls into recession. »
50 basis points worse than 75
What about the 50 basis point option? ” Paradoxically, 50 basis points could be worse [pour les marchés] that 75 », According to Alexandre Hezez, European investors need a clear signal. After a speech by Jerome Powell in Jackson Hole, ” deliberately aggressive “, underlines the strategist of Groupe Richelieu, the ECB begins to fall behind its American counterpart. ” Between the Fed and the ECB, the tie is in favor of Powell “, he adds.
Véronique Riches-Flores, founder of RichesFlores Research, agrees: “ The fact is that by being timorous, [la BCE] would take a major risk of causing another, potentially significant, drop in the European currency as expectations of future Fed rate hikes grew particularly tight “, she explains in a note. A further drop in the euro, which has now fallen below parity with the greenback, would increase the cost of imports, particularly in terms of energy, and therefore the effects of this crisis on inflation. ” To counter this risk, he [la BCE] surprise: raise its key rates at least at the same pace as what is expected across the Atlantic, 75 basis points, (…) to convince of its determinationshe believes, ten countries [de la zone euro] record [déjà] a price increase of more than 10% per year (…) The real surprise would be if the ECB did not raise its rates by ¾ points on Thursday. »
winter is coming
Oxford Economics also expects a 75 basis point rise in ECB rates on Thursday, before further hikes of 50 and 25 basis points, respectively, in October and December, given a spike in inflation which is not yet reached. ” We only see an accommodating pivot point in 2023 and expect the Eurozone to fall into recession “, estimates the research office, “ energy inflation will rise more sharply than expected, spilling over into non-energy components and further reducing real incomes. Thus, we expect inflation to remain elevated in the near term, before gradually easing. ” But ” this surge in inflation will weigh on demand, curbing growth and plunging the euro zone into recession this winter. »
A scenario corroborated by the latest activity figures published on the continent, the S&P Global PMI composite index, which summarizes a survey of purchasing managers in industry and services in Europe, considered a reliable barometer of the evolution of the economy as a whole, fell again last month to 48.9, an 18-month low, after 49.9 in July. Figures below the 50 point mark reflect a contraction in activity.
” This PMI survey indicates that the Eurozone is entering recession earlier than we had estimated, led by Germany, the largest economy in the bloc, and we now expect the Eurozone to experience a prolonged recession. over three quarters “Reacted Peter Schaffrik, economist at Royal Bank of Canada.