Between market turbulence and inflation still skyrocketing, the European Central Bank (ECB) breaks in. The central entity of the eurozone meets this Thursday with the intention of raising interest rates.
The meeting arrives with the main rate at 3%. In the roadmap drawn up by Christine Lagarde herself, president, a new rise of 50 points (0.50%) tomorrow was taken for granted. The situation has turned around in the last week, with the fall of banks in the US and turbulence at Credit Suisse, which leaves more than one thinking of a contagion effect on the rest of the continent. Not following the roadmap could send a message that things are going worse than expected, it is agreed.
The central scenario, the one that everyone takes for granted and that the ECB itself is considering, is that rates rise 50 points tomorrow, to 3.50%. This is logical considering that inflation, which is monitored the most by the central bank, continues to skyrocket, at 8.5% in February in the euro area. “This is expected, it is good to approach the levels of the US (4.50%-4.75%), which has similar inflation rates. Here we are lagging behind,” argues Xavier Brun, director of equities at Trea and director of the Master’s in Finance and Banking at UPF-BSM.
Despite the turbulence that is suddenly around, the 50 points are seen almost as “an obligation” or “what is desirable” to curb prices, according to the sources consulted. “Jerome Powell -president of the US Federal Reserve- already clearly said that there was going to be pain with the rate rise. The ECB cannot stop doing so despite the fact that the moment invites caution”, recalls Javier Molina , Senior Market Analyst for eToro. In addition, not complying with the forecast “impacts the credibility of the ECB, it is better to keep the first message.”
Much less likely is a 25-point raise. “I do not rule it out. It is reasonable and consistent with the context. It is more cautious and the ECB will have more opportunities to raise rates in future meetings, extending the path,” says Guillermo Santos, partner at iCapital, who in any case also sees the 50 points as central stage.
The last, with remote probabilities, is to do nothing. It would be the worst image can convey. “If the rates do not rise, it can be negative because it will mean that the situation is worse than expected,” explains Brun.
Deviating from center stage doesn’t seem like the best idea. “It can be lethal for stock markets and bonds. We were assuming that rates were going to rise more and the opposite could lead to falls because we don’t know what we’re up against,” says Molina.
As with any ECB meeting, the post-Council meeting press conference will be closely watched. “More than how much the rates rise, the important thing will be the message that is given,” they raise from eToro. “How the rise is modulated, how it is transmitted, that they tell us how far they want to take them, for how long the rates will be high, if the economic conditions have changed… And see if the fight against inflation or the conditions of the economy. It could be the most important meeting of the year,” says Molina. “We will have to read between the lines. If Lagarde says that the path of rises continues, it may be counterproductive with the one that is falling,” warns Brun.
Again, considering alternatives, if this Thursday he does not go up 50 points, he will not change his route. “If the increase is tempered to 25 points, it does not mean that the increases will continue until inflation is reduced. And inflation is not being reduced,” warns Santos.
The general forecast is for rates to continue rising to 3.75%-4% towards the end of the year. The key will be how you get there, if at a lower speed than expected until recently.
In the end, the ECB has the great mandate to control inflation. “The situation with inflation is highly worrying and without a doubt rates will continue to rise,” Santos insists. The great reference in monetary policy continues to put pressure for more increases.
But “inflation is beginning to come under control despite being relatively high. The core -underlying- growth rate has been decreasing”, comments Brun. In the March data, the statistical comparison effect is expected to yield much lower figures. The war started a year ago and the first blow came in March 2022, with prices skyrocketing in energy and electricity. When comparing now with that month, and with energy close to pre-war levels, inflation would have to drop, something that would also be seen in Spain.
When the interest rate hike started last year, the impact on consumers, especially in mortgages, was notable. The possible rise in rates would have less of an effect this time. Because if the message that is given is that we will have lower rates, “it will benefit us, since there will not be such a high Euribor (it has already relaxed in recent days with that possibility) to review mortgages,” Molina believes. In any case, since rates have to continue rising until inflation is tamed, the Euribor will do the same, rise, says Santos.
