As an important precondition for the first rate hike, the end of the multi-billion dollar APP purchase program should be sealed at an external ECB meeting in Amsterdam next Thursday. This is seen as a precursor of a rate hike that will probably take place in July.
ECB president Christine Lagarde signaled that negative interest rates would be history by the end of September. “The first rate hike in July is almost a foregone conclusion, and the real question centers on the scale of the rate hike,” said Matthew Ryan, an analyst at Ebury financial services firm.
The French head of the ECB wants bond purchases to be stopped at the beginning of the third quarter: “Whether it will be exactly on June 30 or a few days later is ultimately irrelevant. The only important thing is that they are over and the path to a rate hike at the July meeting is clear, says Commerzbank expert Michael Schubert. The APP program, which was used to provide liquidity to the financial markets even after the main pandemic-related PEPP crisis program had expired, has already been significantly reduced – to a monthly purchase value of just EUR 20 billion.
Clear signal required
Some of the ECB Council’s currency watchdogs are already shuffling their feet in anticipation of the first rate hike: “We’ll take this step in July. The time for waiting and hesitating is over, ”says head of the Slovak central bank, Peter Kazimir. The ECB is under pressure as inflation hits a record high of 8.1%.
At the June meeting, a clear signal must be given as to where this journey is headed, demands the head of the Bundesbank, Joachim Nagel. The first hike in July should be followed by another hike in the second half of the year. On the other side of the Atlantic, the US Federal Reserve changed interest rates in March. In early May, the Federal Reserve even made its largest rate hike in 22 years, raising the base rate by half a point to a new range of 0.75 to 1.0 percent. The next few sessions showed increases of the same magnitude.
“The ECB realizes that in the face of currently very high inflation, it must initiate a change in interest rates,” explains Commerzbank expert Schubert. Otherwise, you will lose control of your inflation expectations. Many economists assume a series of steps. “We expect the ECB to end its net asset purchases in June and raise interest rates by 25 basis points in July, September and December, as well as March 2023.” – Citigroup experts write.
Is only one interest rate screw adjusted?
New economic forecasts of ECB economists available for Thursday’s interest rate meeting may provide further arguments for a change in interest rates. According to Ulrike Kastens, a European economist associated with the DWS fund, this should indicate weaker growth and a significant increase in inflation.
In their latest March forecasts, ECB economists continued to see inflation at 5.1%. this year, and 2.1 percent. was estimated for 2023. From the point of view of Frederik Ducrozet, chief economic analyst at the Swiss asset management company Pictet, the inflation forecast for 2024 is particularly important. According to Ducrozet, it can now be increased from 1.9 percent to over two percent. This would exceed the ECB’s inflation target of 2%.
Even if the euro keepers decide in July to raise interest rates for the first time since 2011, that probably doesn’t mean they will be spinning all three interest rate screws at once. It is more likely that only the deposit rate will be adjusted initially: it is now minus 0.5%. and could initially be increased by a quarter of a percentage point. This means that commercial banks would have to pay lower fees if they parked excess funds with the ECB. However, this does not mean that the main refinancing rate will also be raised.
This interest rate, known in technical jargon as MRO, is now 0.00 percent. This means that banks can borrow money from the ECB at virtually no cost. If they do this overnight, the highest credit rate of 0.25 percent becomes due.
“My forecast is that if the ECB raises interest rates for the first time in July, it will only raise the deposit rate by 25 basis points,” says monetary policy expert Schubert. Then there would be a relatively narrow corridor for the three key interest rates, which would also have the advantage that the money market could be better controlled due to the relatively narrow scope. But even if the zero interest rate for the MRO were to be raised in September, the deposit rate would remain the most important key interest rate: “That’s because excess liquidity is still extremely high. As long as this is the case, the money’s market rate will depend on the deposit rate, ”explained Schubert.