Author丨Wu Bin
Edit丨Li Yanxia
Picture Source丨 Visual China
As the Fed's policy tightening continues to exceed expectations, European Central Bank is also under great pressure. After the historic hike of 775 basis points in September, the ECB may still find it difficult to slow down at the end of October.
More and more ECB officials are supporting the ECB raising interest rates by another 75 basis points at the end of this month. Martins Kazaks, governor of the European Central Bank and Latvia's central bank, said on the 13th that the European Central Bank should continue to raise interest rates quickly, and the expansionary fiscal policy of the euro zone 19 countries is also raising the risk that the European Central Bank has to further tighten its policies. He believes the ECB should raise the deposit rate of 0.75% by 75 basis points on October 27 and should raise interest rates again sharply in December.
echoes this, Bundesliga Governor Nager also said that the ECB should conduct a "strong" interest rate hike at its next meeting and start shrinking its large amount of bonds in 2023 to combat continued high inflation.
Faced with high inflation that has not been seen in decades and pressure on the Federal Reserve’s super hawkish monetary policy, how far does the ECB have to go to tighten?
The Federal Reserve's super hawkish policy has intensified the pressure on the European Central Bank
This week, the U.S. inflation data exceeded expectations again. On October 13, data released by the U.S. Bureau of Labor Statistics showed that the U.S. CPI rose 8.2% year-on-year in September, down only 0.1 percentage point from August, stronger than economists' expectations of 8.1%, and was above 8% for the seventh consecutive month. Meanwhile, the U.S. core CPI rose 6.6% year-on-year, the fastest gain since 1982, and higher than the average economist expectation of 6.5%.
Global market strategist Zhao Yaoting, Invesco Asia Pacific (except Japan), told the 21st Century Business Herald reporter that the consumer price index continued to perform poorly, exacerbating concerns about continued high inflation. core prices have risen higher than expected, and the Fed is expected to raise interest rates by 75 basis points at its November meeting, which may also mean that the Fed may continue to raise interest rates at this pace in December and after.
After the latest inflation data was released, the market expects the Federal Reserve to raise interest rates by 75 basis points in the remaining two meetings of the year. According to CME's Fed observation tool, the market currently expects that the probability of the Fed raising interest rates to 4.50%-4.75% by the end of the year has reached two-thirds.
Barclays also predicts that the pace of the Federal Reserve's interest rate hike will be more radical. The Federal Reserve is expected to raise the federal funds rate by 75 basis points in December, after a 50 basis points hike is expected. Meanwhile, Barclays expects the Federal Reserve to raise interest rates by 50 basis points at its February 2023 meeting, compared with the previous forecast of 25 basis points. Barclays expects the U.S. federal funds rate for to rise to the range of 5%-5.25% in February next year, an increase of 50 basis points from the previous expected 4.50%-4.75%.
The Fed is becoming more hawkish, and the European Central Bank is also doubling its pressure. Josep Borrell, senior representative of EU Foreign and Security Policy, said that central banks in various countries are being forced to follow the Fed's multiple interest rate hikes to prevent further sharp depreciation of their currencies against the US dollar. "Many countries have to follow the Fed's interest rate hike, otherwise the currency will depreciate. And when everyone rushes to raise interest rates, it may lead to a recession of global economy. "
Although the European Central Bank has abandoned its previous dovish stance, , compared with the Federal Reserve, the European Central Bank's policies are still relatively loose, which has also exacerbated the weakness of euro , and the euro against the US dollar exchange rate continues to struggle below parity.
Oxford Economic Research Institute economist Rory Fennessy analyzed to a reporter from 21st Century Business Herald that the rapid tightening of monetary policy of the Federal Reserve is one of the reasons for the strengthening of the US dollar, and the interest rate spread between the euro zone and the United States will not narrow until 2024. ECB officials have commented on the weakening of the euro and they may consider this in their decision-making, even if only a little bit.
still need to continue to strengthen the road of strong tightening?
As the euro zone inflation rate enters the double-digit era, the pressure on the ECB is increasing day by day.
European Union Statistics Office data showed that the Consumer Price Index (CPI) of the 19 countries in the euro zone recorded a month-on-month increase of 1.2%, far higher than 0.6% in August. The year-on-year increase in inflation rate was 10%, setting a record high and significantly higher than 9.1% in August.
Fennessy analyzed to reporters that the main driving factor of the inflation shock in the euro zone is the rising cost of imported energy. As energy imports are mainly traded in US dollars, the weakening of the euro has exacerbated the rising cost of imported energy. As consumers cannot easily switch to cheaper forms of energy, they will have to cut their discretionary spending. In addition to oil, most imported goods outside the euro zone are also denominated in US dollars, which amplifies price increases.
In the euro zone, France's inflation increased the lowest year-on-year, but it also reached 6.2%. French National Statistics Office said that the slightly lower inflation data is mainly due to the slowdown in domestic energy and service prices. Compared with
, the inflation of Central and Eastern European countries is even more serious. The closest geographically to the Russian-Ukrainian conflict, the three Baltic countries, is in the worst situation. The inflation of Estonia , Lithuania and Latvia respectively increased by 24.2%, 22.5% and 22.4% year-on-year.
In the view of Kong Tianping, a researcher at the Institute of European Studies of the Chinese Academy of Social Sciences, Central and Eastern European countries are highly dependent on Russia in terms of energy and their economy is vulnerable to external shocks. After the outbreak of the Russian-Ukrainian conflict in February this year, the global price of commodities soared and energy prices soared, resulting in the continued rise of inflation in Europe, and Central and Eastern European countries have become the "hardest hit areas" of high inflation, and the external environment of economic development deteriorated sharply. Although tightening monetary policy helps to curb high inflation, it is not conducive to economic activities and may also exacerbate the risk of economic recession. Central and Eastern European central banks have to maintain a balance between controlling inflation and promoting growth.
Regarding the severe inflation situation, ECB President Lagarde said that to ensure that medium-term inflation will recover to 2%, the ECB will take necessary measures to continue hike interest rates in the next few meetings. "If we don't fulfill this, it will hurt the economy more."
Next, the European Central Bank will rely more on data. Lagarde said the ECB must make decisions based on successive meetings and must be guided by data, and in the current situation, interest rates are the most appropriate tool. The European Central Bank is underway to normalize monetary policy, and the discussion on quantitative austerity in has also begun and will continue.
European Central Bank policymakers had discussed a detailed timetable for cutting their bond portfolios of 3.3 trillion earlier this month and envisioned a quantitative tightening sometime in the second quarter of 2023, with specific plans still unclear.
It should be noted that although the ECB interest rate hike cycle has just begun, a series of economic data released by the euro area recently have been showing signs of fatigue, and the continued weakness of the euro has exacerbated the European economic difficulties.
Fennessy told reporters that the weakening of the euro has dragged down the economic growth of the euro zone in the short term, and the weakness of the euro may continue until most of 2023. Even if the pressure on geopolitical is alleviated, we believe that long-term structural factors will suppress the appreciation rate of the euro.
On the other hand, the weak euro also has some potential benefits. Fennessy told reporters that once the high-inflation of starts to fade, some of the benefits of the weakening of exchange rate will be revealed. Starting from 2024, the rebound in global growth will drive stronger external demand, and the depreciation of the euro will bring favorable trade terms to growth.
Although the overall economic outlook is not optimistic, the ECB can only grit its teeth and raise interest rates. Pierre Wunsch, governor of the ECB and Belgian Central Bank, believes that despite the risk of an economic recession, it is still necessary for the ECB to raise the real interest rate to positive. "Although the situation in Europe is different from that in the UK and the United States, we are roughly consistent in monetary policy in the past six months. I am relatively sure that the deposit mechanism interest rate can exceed 2%. If necessary, it will not surprise me if it exceeds 3%. "
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Editor of this issue Jiang Peipei Intern Luo Xinyu
