The European Central Bank in the footsteps of the Fed?


(Boursier.com) — Will the European Central Bank follow in the footsteps of the Fed? Following a historic 75 basis point rise in the ECB’s key rates, the market is wondering if the institution will do the same next month.

For Klaas Knot, member of the Governing Council, the Central Bank must in any case raise its interest rates further to prevent the record inflation in the euro zone from having an impact on wages. Thursday’s 75 basis point move was a “strong and important signal, but more steps should follow”, the president of the Dutch central bank told Dutch radio, warning of a “significant risk of second-round effects”: “the ECB has moved to raise key rates in order to calm the economic cycle and keep inflation expectations anchored… We will continue to do so until the outlook for inflation have stabilized around our medium-term target of 2%.

Slovak colleague Peter Kazimir called for “resolute hikes” to tackle “unacceptably high” price rises, and Estonian Madis Muller warned that delaying a rate hike too long risks requiring a “much stronger brake on the economy” later to control prices. Banque de France Governor François Villeroy de Galhau spoke in favor of “orderly but determined” action, although he warned that the excessive increase in rates does not mean that the BCE has developed a “jumbo habit”: “we have a completely free hand. No one should speculate on the magnitude of the next stage”.

Christine Lagarde estimated on Thursday that the neutral rate, the one that neither stimulates nor slows down the economy, had not yet been reached and that it would take less than five monetary policy meetings to achieve it, taking into account that of September . The leader also pointed out that a 75 basis point hike had not become the norm, while refusing to rule out such a measure in October.

Money markets now estimate the probability of another 75 basis point move in October at 40%. Among the specialists, the bets are not very clear either for the next month. While further tightening is not in doubt, the question now is whether it will be 50bp or 75bp. And why not 100 bp?

“We think the ECB will be reluctant to slow the pace of rate hikes significantly until the peak of inflation has passed. Having started the hikes higher than the traditional 25 basis point increment, it there is little reason to change this pace significantly as long as the monetary policy stance remains accommodative. We believe the ECB will seek to bring its key rates back into neutral territory fairly soon, and we expect further rate hikes accordingly. 50 basis points in October and December. Then we expect hikes of 25 basis points next year, as the up cycle shifts more decisively from a phase of normalization to one of tight monetary policy.” , says Konstantin Veit, portfolio manager at PIMCO.

At DWS, it is estimated that “inflation rates will leave the ECB no choice but to continue to raise interest rates sharply in October and December, even if the euro zone is already looking at a slowdown in here because of the consequences of the looming energy crisis. A hike in interest rates of 100 basis points cannot even be ruled out if inflation rates continue to rise and if the situation of the economy in the face of energy shortage is proving more favorable than expected”.



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