According to the Market Matrix (Matrix.net), after a sharp rate hike of 475 basis points, several European Central Bank officials delivered speeches, and the consensus seems to be - at least 50 basis points at the meeting on October 27, although this means the region is falling into a recession faster - and regardless of the rate hike this time, there will be a need to continue hikes later.
Another consensus is that they do not believe that a recession can cause inflation to automatically and/or accelerate downward.
▉ official speech
Management Committee member and GER central bank governor Joachim Nagel said Friday that the ECB must continue to raise interest rates “significantly” to counter record inflation.
In an interview with German media, he said: "If the inflation rate is 10%, but the interest rate is only 1.25%, then I know the need to take action. Interest rates must continue to rise - - and it is significant."
Euro inflation rate reached 10% in September _By Bloomberg
He explained: "While external forces initially promoted inflation, it now affects a large part of our basket of commodities. Therefore, we must take decisive action to prevent high prices from becoming entrenched. This requires a strong enough and fast response. The next meeting of the Council must send a clear signal."
Regarding Germany's economic and inflation outlook, he said: "The German economy may start shrinking in the last quarter, with a recession expected to intensify this quarter and continue to shrink in early 2023. However, this will not be a deep recession, next year's production ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ” ”
Economists expect inflation to peak at 9.6% in the fourth quarter, but it is above that level in September _By Bloomberg
He said: "My feeling is that we will continue to raise interest rates in the next few meetings. We are likely to keep our current policy tightening pace. We may not stop there when we talk about normalization. A still on the agenda monetary policy is a reversal of the quantitative easing tool and may take measures by the end of the year."
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However, member of the management committee and governor of the central bank of Portugal (POR) Mario Centino warned that as the economy is weak, excessive raising of interest rates to curb inflation may exacerbate the downward trend. He urged "controlled and balanced" steps to provide a "stable source."
He said: "As policy makers, there is one thing I always worry about, and not be forced to go back to the path we have to follow. If we go back and forth, this will send a mixed signal to the market, our citizens - it's terrible."
He urged officials to be cautious and take "small steps possible", and he also warned not to rush to discuss cutting the trillions of euro bonds accumulated in past crises. He believes that premature discussion of quantitative austerity may have destabilizing effects.
These comments seem to be consistent with other policy makers who prefer to raise interest rates again at their October meeting by 75 basis points. Gediminas Simkus, member of the Management Committee of
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and governor of the central bank of Lithuania (LTU), said that as inflation approaches an all-time high, he tends to support a 75 basis point rate hike at the upcoming meeting. However, he pointed out that 100 basis points hikes are "certainly" too much, while 50 basis points are the lowest.
Traders expect the ECB to raise interest rates to 2.5% by July 2023 _By Bloomberg
Earlier, he said that the ECB will raise interest rates by at least 50 basis points next month as the inflation outlook worsens.
He said: "Based on the data I'm seeing now, inflation trends are intensifying. For the extent of rate hikes in October, there are several options on the table, with the lowest being 50 basis points. Other factors will also affect decision-making - including inflation expectations and employment."
He added: "European economic contraction has a suppressive effect on inflation. However, this does not mean that the governing committee should not make decisions on rate hikes, including reducing the balance sheet."
He also said that the recession "does not mean that the governing committee should not make decisions." Martins Kazakhs, member of the Management Committee of
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and governor of Latvia (LAT), said that the ECB should raise interest rates by another 75 basis points the next time it formulates its policy in October, and the rate hikes may become smaller after that.
He said: "In the current situation, we can still take a big step, and the next step still has to be big, because we are still far from a rate consistent with the 2% inflation rate. I will support a 75 basis point rate hike - let's take a bigger step and raise interest rates faster. However, that doesn't mean from now on, 75 basis points is the standard rate hike. Once interest rates are more aligned with inflation targets, future steps will need to become more cautious."
Regarding the depreciation of the euro, he said that this really concerns him because the weak euro will indeed increase inflation.
Kazakhs said borrowing costs are likely to reach "neutral" levels. European Central Bank President Lagarde has said that policy makers will start considering reducing their balance sheet after interest rates reach neutral levels.
In response to this, Kazakhs said: "Of course, internally, we are - we should - discuss all the tools so that when a decision needs to be made, we are ready. But the ECB should leave quantitative austerity policy until next year to decide."
He acknowledged that some of the risks described in the ECB September 3 economic forecast - the euro zone economy is stagnant, not entering a recession - has been achieved. "If we manage to avoid this crisis in Europe, I think it will be quite successful, but I think it will be very difficult. I don't expect the upcoming recession to solve the inflation problem."
Although he favors strong action in the near term, he cautions against being too radical. He said 100 basis points hikes at the October meeting were too radical. Previously, Robert Holzman, a senior hawk at the European Central Bank, also expressed this view.
Kazakhs said: "Given that the main source of inflation is energy, it is geopolitical, structural, and tightening monetary policy very quickly, just to push the economy to recession, which is not a reasonable choice." ECB President Christine Lagarde said that even if the economy slows down sharply, the ECB will continue to raise interest rates.
She told the European Parliament: "We expect further rate hikes in the next few meetings to curb demand and prevent the risk of continued rising inflation expectations."
She warned that European governments have too broad support for households and businesses, suggesting that these measures may interfere with the ECB's efforts to lower inflation.
She said: "Comprehensive measures are more than those tailored specifically for those who need it the most. This approach does not necessarily facilitate good coordination of fiscal and monetary policies."
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, and ECB Executive Committee member Isabel Schnabel said the recession will not prompt the central bank to stop hikes.
She said: "The recent recession will have a suppressive effect on inflation. Of course, we will take this into account when adjusting monetary policy. However, the starting point of interest rates is very low, so it is obvious that we need to continue hikes."
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ECB Deputy Governor Luis de Kindos said that the ECB will need to continue to suppress inflation because the economic slowdown in the euro zone is not enough to curb consumer prices. "We must strengthen all elements that support the central bank's credibility and avoid the second round of impact. The slowdown itself will not reduce inflation."Monetary policy needs to help ease inflation. ”
He also said that the Management Committee has not discussed how or when it can cut its balance sheet or determine what level the exact neutral interest rate may be at.
He added: “The era of fiscal policy at all costs is over and any government action should be targeted and selective.” "
▉ market expects
As of press time, according to swap , which is linked to the date of the ECB meeting, the money market now expects a 100% chance of hikes of 75 basis points. The interest rate hike of this scale will double the policy interest rate to 1.5%, the highest since 2008.
Antoine Gavo, interest rate strategist at Citigroup (CitiGroup), said:
Given the inflation situation and outlook, as well as the many challenges facing the economy, it is difficult for participants to oppose a 75 basis point rate hike at the October meeting. |
Goldman Sachs Group (Goldman) Jarry Stern, an economist at Sachs, said the ECB could raise interest rates by 75 basis points at its October and December meetings. He said:
Previously we expected the ECB to raise interest rates by 50 basis points at its last meeting of this year, but now, we think that rising inflation in the fourth quarter will make it difficult to slow down the pace of rate hikes. We predict another 50 basis points in February next year - - Double the previous forecast. Therefore, our updated forecast raises terminal interest rates to 2.75%, and policies bring more obvious restrictive levels. |
and this interest rate outlook is unlikely to boost the euro. Thomas Fruri, head of foreign exchange strategy at UBS Wealth Management (UBS), said: "The hawkish Fed has triggered longer expectations of rate hike cycle , and the prospect of Europe falling into recession due to rising energy prices should be increasingly favorable for the euro to fall against the dollar. ”
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