At its February meeting, the European Central Bank decided to raise its interest rates by 50 basis points, bringing the interest rate on the main refinancing operations to 3.00%, the interest rates on the marginal lending facility to 3.25% and the rates on the deposit facility to 2.50%.
It also announced that it intended to raise interest rates by another 50 basis points at its next meeting, which will take place 16 March, a statement that was echoed by ECB president Lagarde during a speech to the European Parliament in February.
Views from analysts
“We expect another 50 bps hike in the deposit rate, and another 50 bps one in early May,” stated César Pérez Ruiz, chief investment officer at Pictet Wealth Management in a PWM weekly view published on 13 March.
Although lower energy prices are pushing headline inflation down, core inflation has continued to increase, said Carsten Brzeski, global head of macro for ING Research in an analysis article published on 8 March. “Macro developments since the February meeting have not brought any relief for inflation and the inflation outlook, which is why a 50 bp rate hike looks like a done deal.”
“A stronger growth profile coupled with an upwards revision to core inflation will only play into the hands of the hawks, compounding our view that the ECB are more likely than not working on the assumption that they will raise rates a further 50bp in May before decelerating the pace of tightening,” Simon Harvey, head of FX analysis at Monex Europe, said in a forecast published on 13 March. Harvey noted that core inflation in the eurozone was 5.6% in February, and expected that the core inflation forecast for 2023 would be revised up.
But Brzeski also noted that there seems to be a divide amongst ECB officials as to what approach to take in the future. “While chief economist Philip Lane and other argue for a more cautious approach, which could lead to a slowing of the rate hike pace and a not so far away pause or end, the hawkish camp, currently headed by [member of the ECB’s executive board] Isabel Schnabel, argues in favour of further firm tightening.”
ING’s “base-case scenario” sees the ECB increase rates by 25 bps in May and June, then pause its hiking cycle, but cautions that between March and the ECB’s next meeting in May, data such as an update of a bank lending survey or first-quarter GDP growth will become available.
For Monex, with rates getting close to 4%, this is “a level in which we think the political rift within the [ECB’s] Governing Council will ultimately stall the hiking cycle.”
Ruiz from Pictet Wealth Management also noted that the future direction of ECB bond purchases will be of interest, while ING’s Brzeski added that they will be keeping “a very close eye” on the underlying profile of the ECB’s growth projections.
If the ECB maintains its view that the eurozone’s economy will return to pre-pandemic growth rates later this year, “the risk of further rate hike overshooting increases.” But if the central bank forecasts more subdued growth, ING said, “our call of the terminal rate for the deposit rate at 3.5% looks realistic.”
A glance at the US
In Monex’s forecast, Harvey mentioned that “US markets were rocked” last week, first by Federal Reserve chairman Jerome Powell’s senate testimony, in which he suggested that the Fed could return to 50 bp hikes, then by the Silicon Valley Bank situation. “These developments saw market expectations for the Fed hiking 50 bp this month go from 20% at the start of the week, to over 70% before retreating again to the 50% mark.” The Fed’s next meeting is planned for 21-22 March.
It will be key to see what the US consumer price index for February brings, noted Pictet’s Ruiz. The data is expected be released on 14 March.