Between turbulence in the market and inflation still soaring, today the European Central Bank (ECB) intervenes. The central bank of the eurozone meets this Thursday with the intention of raising interest rates. The meeting comes with the main rate at 3%, and in the roadmap drawn up by the president herself, Christine Lagarde, a new increase of 50 basis points (0.50 points) was taken for granted.
The situation has turned in the last week, with the fall of Silicon Valley Bank in the US and turbulence in Europe due to the Credit Suisse crisis, which leave more than one thinking about a contagion effect in the rest of the continent. Failure to follow the roadmap could send a message that things are going worse than expected, analysts agree.
The central scenario, which everyone takes for granted and which the ECB itself is studying, is for rates to rise by 0.5 points, to 3.50%. It is logical considering that inflation, which the central bank monitors the most, continues to soar, at 8.5% in February in the eurozone. “It is as expected, it is good to approach the levels of the USA (4.50%-4.75%), which has similar inflation rates. Here we are lagging behind”, argues Xavier Brun, Trea’s equity director and director of the master’s degree in Finance and Banking at the UPF-BSM.
Despite the sudden turbulence, the 0.5 points are seen almost as “a must” or “desirable” to curb prices, according to the sources consulted. “Jerome Powell – president of the US Federal Reserve – already clearly said that there would be pain with the rate hike. The ECB cannot stop doing so despite the fact that the moment calls for caution”, remembers Javier Molina, senior market analyst for eToro. In addition, not fulfilling what had been planned “impacts the credibility of the ECB, it is better to keep the first message”. A rise of 0.25 points is much less likely. “I don’t 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, which would delay the path”, says Guillermo Santos, partner of iCapital, who in any case also sees 0.5 points as the central scenario.
The last scenario, with remote probabilities, is to do nothing. It would be the one that would convey the worst image. “If rates don’t go up, it can be negative because it will mean that the situation is worse than expected”, explains Brun.
“It can be lethal for stock markets and bonds. We had assumed that the rates would rise more and the opposite can cause falls because we would not know what we are facing”, says Molina.
The press conference following the ECB council meeting will be closely watched. “More than how much the rates go up, the important thing will be the message that will be given”, say eToro. “How is the rise modulated, how is it transmitted, that they tell us how far they want to take them, how long the rates will be high, if the economic conditions have changed… And see if the fight against inflation or the conditions seem more important of the economy It could be the most important meeting of the year”, says Molina. “You have to read between the lines. If Lagarde says that the path of increases continues, perhaps it is counterproductive to the one that is falling”, warns Brun.
“The fact that the increase is moderated to 25 points does not mean that the increases will continue until we see that inflation is reduced. And inflation is not reducing”, warns Santos. The general forecast is that rates will continue to rise to 3.75%-4% towards the end of the year. The key is how to 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 any doubt rates will continue to rise”, insists Santos. The big benchmark in monetary policy continues to push for more hikes. But “inflation is starting to be controlled despite it being relatively high. The core – underlying – growth rate has been decreasing”, comments Brun. The war started a year ago and the first hit came in March 2022, with energy and electricity prices skyrocketing. If it is now compared with that month, and with energy close to pre-war levels, inflation should fall, something that would also be seen in Spain.
When the rate hike started last year, the impact on consumers, especially in mortgages, was remarkable. This time the hike would have a smaller effect. Because if the message that is given is that we will have less high rates “it will benefit us, since there will not be such a high Euribor (it has already relaxed in recent days with this possibility) to review the mortgages”, believes Molina. In any case, since rates must continue to rise until inflation is tamed, the Euribor will do the same, rise, says Santos.
