Once again we are at the top of the sinusoidal cycle of central bank meetings. The Governing Council of the European Central Bank meets eight times a year to discuss further monetary policy, and the announcements and the ensuing press conference are eagerly awaited almost every time. Today’s ECB meeting is expected to be a “turning point”. Many questions have already been answered in advance, but many more are still waiting to be answered. Investors are focused on relatively hawkish overall sentiment, in line with comments from individual members of the board over the past few weeks.
They still are Key interest rates in the euro area was not raised. The proper deposit rate is still at an all-time low of -0.50%. And this afternoon, with probability bordering on certainty, nothing will change about it. The European Central Bank will take six more weeks to complete the first rate hike. The likelihood that the central bank will abandon its plans is getting smaller every day.
In a blog post in late May, ECB President Christine Lagarde outlined a possible way to start monetary normalization, which a few days later was described by the chief economist of the central bank, Philip Lane, as “reference path‘has been signed. Therefore, the ECB would end the (net) asset purchases by early July at the latest, raise the deposit rate for the first time at the Council meeting on July 21, and leave the world with negative key interest rates “until the end of the third quarter”. The next meeting of the ECB Council is scheduled for September 8, between July 21 and the end of the third quarter.
The beginning of the exit from ultra-expansive monetary policy seems to be quite clearly defined and this “benchmark path” should probably be described as the expectation of consensus among observers. And yet it still remains lots of questions open. There will likely be few answers today, but there may be some valuable information. Firstwill the ECB raise interest rates in steps of 25 or 50 basis points? The market is ambivalent for the July session, but later in the year it priced in a move of at least 50 bp. SecondlyWill the ECB – if circumstances allow – raise the base interest rate at every Council meeting after September, or only once a quarter? The market is clearly leaning towards the first option. Thirdis there a target, a “neutral” level of interest rates, which the Monetary Policy Council will use as a reference point to which it will adjust the general scope of interest rate increases? FourthWill the further process of monetary policy normalization be associated with any form of forward guidance? Fifthby how much lower GDP growth forecasts and how much higher inflation forecasts? Here we will focus on whether the long-term inflation projection for 2024 will be raised from 1.9% to 2.0%, or even more. Sixthwill the ECB make changes to its TLTRO program? and seventhWhat are the Council’s considerations regarding the instrument that can be used to counter possible fragmentation of the interest rate markets in the currency area?
At the end of today’s press conference, the markets should have a certain majority opinion as to whether the ECB is referring to a rather flat or rather high rate hike. It is possible, as is often the case, that the agency’s reports on the moods in the Monetary Policy Council will exacerbate the mood in the market. In line with the money market curves, investors are currently leaning towards a rather steep path of key interest rates with increases of 125 bp this year and around 100 bp next year. This gives a lot of freedom, but on the other hand it is not the maximum you can imagine. In the afternoon, large price fluctuations in all asset classes and in the foreign exchange market are almost guaranteed. And soon investors will move to the Fed’s sine curve, and we will face another two milestones, i.e. the FOMC meeting next week and inflation tomorrow …
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Article Seven questions about the ECB’s decisions first appeared on the onemarkets blog (HypoVereinsbank – UniCredit Bank AG).