The European Central Bank will make a major policy announcement at 12.15pm, with President Christine Lagarde addressing the press in confirmation immediately afterwards at 12.45pm.
The European Central Bank is contemplating a hike in its already-rising benchmark rate leading to discussions that suggest the likelihood of an increase somewhere between 25 and 50 basis points.
However, economists and markets both appear more inclined towards slightly less dramatic measures this time around. This would mark the seventh consecutive such rise since inflation remains too high for comfort for countries posing a stubborn challenge demanding attention from policymakers.
Despite a 350 basis point increase in interest rates since July, the 20-nation eurozone remains far from achieving its inflation target of 2%. In order to reach that goal, central bank officials are preparing for further tightening this month and into the future.
A 25 basis point rate hike is the expected outcome for this month’s Governing Council meeting, which would be a departure from recent trends of successive 50 basis point increases.
Nonetheless, larger hikes can’t yet be ruled out as conservative hawks look to send firm signals about future moves. This could mark an important turning point in one of the most groundbreaking monetary tightening cycles in history.
Despite some central banks, such as the U.S. Federal Reserve potentially hitting interest rate highs in May, European Central Bank leaders suggest they could agree to a smaller shift if it is backed up by assurances that this won’t be their final move on rates.
As the European Central Bank debates its first rate hike in years, a delicate dance is taking place between ECB President Christine Lagarde and her colleagues.
The size of majority backing required for such an historic decision could prove to be one of the most difficult parts with some members requiring less guidance from their hawkish allies, whilst others preferring cautionary dovishness before any action takes place.
Could ending reinvestments on maturing debt purchased under the current Asset Purchase Programme provide a workable compromise that satisfies both sides?
It remains to be seen whether this move will have enough sway when it comes time to make history at Europe’s foremost financial institution.
Markets are indicating a high likelihood of an ECB rate cut in response to Wednesday’s US Federal Reserve action, which saw rates move up by 25 basis points and potentially signal the end of further increases.
Most economists have echoed this sentiment as well, suggesting that smaller adjustments may be on the horizon for Europe’s central bank.
The European economy’s sluggish growth, sliding credit demand and moderating inflation levels all point towards the need for minimal rates adjustments.
Last quarter saw a modest economic expansion alongside an unprecedented reduction in borrowing signs that past hikes have had their desired effect.
However, if further pressure is applied on this stagnant climate there may be risks of severe credit constraints with long-term consequences on already feeble activity levels currently scraping above zero at 3%.
Caution is mounting over inflation risks as the labor market booms. Hawks warn that prices could stay above target unless the ECB takes more aggressive measures to address underlying growth, which has been higher than expected with unemployment now at a record low despite current economic conditions.
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