The Federal Reserve is far from the only central bank lifting rates in big steps.
The European Central Bank on Thursday is expected to make its second consecutive jumbo sized rate hike of 75 basis points, taking its main policy rate to 1.5%. The decision is due at 2:15 p.m. local time, or 8:15 a.m. Eastern, with President Christine Lagarde’s press conference scheduled a half-hour later.
It comes amid a deteriorating backdrop in the eurozone economy. The most recent flash eurozone composite purchasing managers index fell further into contractionary territory, as Germany’s manufacturing base reels.
But the ECB is set to keep lifting rate with inflation at a record 9.9%.
“While a dovish minority will be mindful of rising recession risks and tightening financial conditions, another hike of 75bps this month is likely to be uncontroversial,” said economists at Daiwa Capital Markets. “While the post-meeting statement will likely repeat that future policy decisions will continue to be data-dependent and made on a meeting-by-meeting basis, it will also likely make clear that rates will likely rise again before year-end.”
Economists at UBS agreed. “We expect the ECB’s communication to remain on the hawkish side and think it will reiterate its aim to hike rates further in the next few meetings,” they said, anticipating the ECB base rate will reach 2.25% in February. The yield on the 2-year German bund
TMBMKDE-02Y,
reached 2% on Wednesday, while the euro
EURUSD,
reclaimed the $1 level.
Another issue is that it may want to start paying banks less to park their reserves at the ECB, possibly reducing the interest paid on deposits. Banks were able to borrow at negative rates, and now can park what are called TLTRO borrowings at the ECB at positive rates.
“We think the ECB will change the TLTRO-terms in a way that unused funds will no longer earn a positive interest rate in the deposit facility, potentially prompting banks to make sizeable voluntary TLTRO-III repayments in the coming months,” said the UBS economists.
The eurozone bank index
SX7E,
has dropped 14% this year.
