Markets anticipate the European Central Bank to announce its seventh consecutive interest rate increase on Thursday due to the uncomfortably high level of inflation in the euro area.
Hawks may feel comfortable arguing for a higher raise now that banks have stabilised somewhat following a March rout, and crucial inflation and bank lending statistics on Tuesday might change the conversation.
The key question, according to Gareth Hill, a fund manager from Royal London Asset Management, is whether it will be 25 or 50 bps.
Surveyed economists predict a 25 bps increase to 3.25%.
Even while alternative choices are still on the table, a recent source-specific report claimed authorities were moving towards such a decision.
ECB board member Isabel Schnabel believes a 50-bps increase is likely, but Francois Villeroy de Galhau from France has suggested that future moves should be modest in scope and frequency.
Tuesday’s data on bank lending plus April inflation could be crucial. Data released on Friday revealed that Germany’s GDP shrank in the first quarter, bolstering the argument for a modest increase.
Still not. Even though it appears that the Federal Reserve will stop its rate hike campaign after this Thursday, the majority of analysts anticipate at least one more rate change.
Market forecasts have the peak of ECB rates this year at roughly 3.6%, while Pierre Wunsch, governor of Belgium’s central bank, claimed he wouldn’t be shocked to see rates climb to 4%.
Francis Yared, current global head of rates for Deutsche Bank, predicted a potential terminal rate over 4% given that underpinning inflation and wages are rising more quickly in Europe than the US and that monetary policy in the euro region has greater room to be expansionary.
He said it wouldn’t be immediately apparent that the peak policy interest rates in the two regions were more than 1% apart.
Tuesday’s flash inflation report should reveal that while if headline inflation is still declining from record highs reached in 2022, the underlying gauge is still much higher than the goal 2% level.
Strong expansion of the service sector of the bloc, which accounts for the majority of its economic activity, shows that core inflation and wage hikes are still high, hampering ECB efforts to control inflation.
A reliable indicator of the state of the economy as a whole, the April flash, the Composite Purchasing Managers’ Index, surged to an 11-month peak of 54.4 in April.
Given the tight employment markets, employees are asking for salary increases to keep up with rising prices.
German public sector workers have reached an agreement that will provide 2.5 million workers with an ongoing rise of 5.5% in 2019.
This might jeopardise the ECB’s prediction that wage growth will hit a high this year and set a crucial precedent for future pay negotiations.
Patrick Saner, present head of macro strategy for Swiss Re, said tight labour markets are enhancing the bargaining strength of employees and unions.
While most people think a wage-price spiral like the one from the 1970s is not probable, recent labour market movements must undoubtedly worry the ECB because they keep the risk of a spiral brewing.
Although it may be too soon to fully assess the full impact of the March financial crisis on financing circumstances, Tuesday’s bank lending should provide some hints.
Analysts believe that the unrest, which reduced the aggregate share prices of European banks by 14% in March (.SX7P), has made corporate lending even more restrictive.
Silvia Ardagna, a European economist for Barclays, claimed the company reduced its forecasts for the policy’s terminal rate by 25 basis points, or bps, to 3.75% as a result of recent developments in the U.S. and Swiss banking systems.
This is because the company anticipates that bank loan offices will become more risk-averse.
